WASHINGTON (Reuters) -U.S. services sector activity picked up in June as orders rebounded, but employment contracted for the third time this year, underscoring the impact of policy uncertainty on businesses.

The Institute for Supply Management (ISM) said on Thursday that its nonmanufacturing purchasing managers index (PMI) increased to 50.8 last month from 49.9 in May. Economists polled by Reuters had forecast the services PMI rising to 50.5. A PMI reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of the economy. 

Economists say businesses are in limbo over the uncertainty about what happens after President Donald Trump's 90-day pause on higher reciprocal tariffs expires next week. A 90-day temporary reduction in duties between the U.S. and China is due to lapse in mid-August. 

The ISM survey's new orders measure rebounded to 51.3 last month from 46.4 in May. The improvement in demand, however, failed to boost employment. The survey's measure of services employment fell to 47.2 from 50.7 in May. It has contracted in three of the last six months.

That is consistent with other data that have suggested a loss of labor market momentum amid a hesitancy by businesses to step up hiring. The ISM has noted that "higher scrutiny is being placed on all jobs that need to be filled, whether it be a new position or backfill for an existing role."

Businesses, however, continue to hoard workers after experiencing difficulties finding labor during and after the COVID-19 pandemic. That is keeping the labor market humming and the overall economy out of recession.

But a period of sluggish growth and high inflation, commonly known as stagflation, remains a risk for the economy. The survey's measure of prices paid for services inputs eased to a still-high 67.5 from 68.7 in May, which was the highest level since November 2022.

Economists expect the tariff boost to inflation to start showing in summer. Inflation has largely remained moderate because businesses have been selling merchandise accumulated before import duties came into effect, they said. 

But some believe competition amid softening demand could blunt some of the anticipated price hikes from tariffs.

Economists expect the Federal Reserve to resume cutting interest rates in September. The U.S. central bank last month left its benchmark overnight interest rate in the 4.25%-4.50% range where it has been since December.

Fed Chair Jerome Powell on Tuesday reiterated the central bank's plans to "wait and learn more" about the impact of tariffs on inflation before lowering rates again.