Stocks have tanked into a bear market and crypto has plunged after the Federal Reserve raised interest rates three times in an attempt to cool the economy and combat four-decade-high inflation. Now there’s evidence that something dramatic changed in June.

Two new surveys from the financial information provider S&P Global show there was a decline in economic activity this month in both the manufacturing and services sectors.

The U.S. Services Business Activity Index—which measures variables like sales, employment, and inventories at 400 private-sector services companies—fell to a five-month low of 51.6 in June, down from 53.4 in May. The figure came in well below economists’ forecasts for 53.5, and it marked the lowest reading in five months.

A reading above 50 on the Services Business Activity Index indicates that the services sector is expanding, while a reading below 50 is indicative of an ongoing contraction.

The index was primarily driven down by order demand, which contracted for the first time since July 2020 this month, while average costs increased at a “marked pace.” That could be a worrying sign for Fed officials who have been hoping a slowdown in economic activity would also cause sky-high consumer prices to decline.

“Having enjoyed a mini boom from consumers returning after the relaxation of pandemic restrictions, many services firms are now seeing households increasingly struggle with the rising cost of living,” Chris Williamson, chief business economist at S&P Global, said in a report accompanying the survey data. 

S&P Global’s U.S. manufacturing index—which measures variables like new orders, output, and employment at 600 industrial companies—also slid in June, dropping to 52.4 from 57 last month. Again, a measure above 50 here indicates the manufacturing sector is expanding, while a measure below 50 is indicative of contraction.

“The pace of U.S. economic growth has slowed sharply in June, with deteriorating forward-looking indicators setting the scene for an economic contraction in the third quarter,” Williamson said of the data. 

“Business confidence is now at a level which would typically herald an economic downturn, adding to the risk of recession,” he added.

Thursday’s survey data has economists worried about the potential for U.S. economic growth to continue its decline in coming quarters; and with inflation remaining elevated, stagflation and recession fears are spreading.

A sign of stagflation or a recession?

Ray Dalio, a billionaire investor and the founder of the investment management firm Bridgewater Associates, said in a LinkedIn post on Tuesday that the Fed will struggle to avoid an economic downturn in the coming months—and that he believes stagflation is now likely. 

Dalio is just one name on a growing list of economists and Wall Street veterans arguing weak economic growth and high inflation are now the base case for the U.S. economy. 

Mohamed El-Erian, the chief economic adviser at Allianz and the president of Cambridge’s Queens’ College, said in May that stagflation is now “unavoidable.” And just this week, the top economist told Yahoo Finance that it is “uncomfortably possible” the Fed will push the economy into a recession as it attempts to cool inflation.

Even the most bullish investment banks have begun sounding the alarm about the potential for a recession in recent weeks. 

UBS’ “hard data model,” which looks at statistics from the housing market, industrial production, consumer spending, and more, now sees a 69% chance of a U.S. recession over the coming year, according to a Thursday research note from economists led by Pierre Lafourcade. That’s up from just 2.5% in April.

“The model is confirming a sharp data slowdown, but the landing zone remains unclear,” the economists wrote. “With this rise in our hard factor model, the average of our three models has now crept up to a 26% probability of a recession, up from 13% in April.”

Whether the U.S. economy can manage a soft landing—where inflation cools without sparking a recession—or is set for a crash is still up for debate, but this week’s data certainly doesn’t add to the bull’s case.