U.S. services sector rebounds in May
ARIZONA, UNITED STATES — Economic activity in the U.S. services sector expanded in May, reversing the contraction seen in April, according to the Institute for Supply Management (ISM).
The ISM’s Services PMI measure of business activity rose to 53.8% in May from 49.4% in April, indicating growth in the sector. Readings above 50% signify expansion.
Business activity and new orders surge
The increase in the composite index in May was driven by higher business activity and faster new order growth. The Business Activity Index rose significantly by 10.3 percentage points to 61.2%, the highest reading since November 2022.
The New Orders Index also improved, reaching 54.1%, bolstered by a 13.9% increase in the New Export Orders Index, which hit 61.8%.
Employment challenges persist
Despite the overall positive trend, employment in the services sector continued to face challenges. The Employment Index rose slightly to 47.1% in May from 45.9% in April, but it remained in contraction territory. This marks the fifth time in six months that the employment index has contracted.
“Employment challenges remain, primarily attributed to difficulties in backfilling positions and controlling labor expenses,” said Anthony Nieves, chair of the ISM’s Services Business Survey Committee.
Inflationary pressures ease but remain elevated
The Supplier Deliveries Index moved into expansion territory at 52.7%, reflecting the longer lead times that are typical as demand increases.
Meanwhile, the Prices Index decreased by 1.1 percentage points to 58.1%, indicating a slower rate of commodities inflation. This index is closely watched by the Federal Reserve as it gauges inflationary pressures.
Market reaction and outlook
The market response to the better-than-expected Services PMI was relatively muted. Investors and executives are keenly watching for the Federal Reserve’s next monetary policy move.
The optimistic Services PMI data was somewhat balanced by a private payrolls report that revealed 152,000 jobs added in May, which fell short of analysts’ expectations.
“Everyone got excited last month with the contraction, and we said to hold on and wait and see how this trends over a period of three or four months,” Nieves commented. “What we are again seeing is the resiliency of the services sector.”
Leadership transition at ISM Services Committee
The May report was the last for Anthony Nieves as the Services Business Committee Chair. He will be succeeded by Steve Miller, CPSM, chief commercial officer at DeepLogica.
Nieves expressed confidence in the ISM Report On Business, stating, “When you look at it historically and how it maps against other data over time, it’s as close as anything else out there to a real-time read.”
The ISM’s Services PMI for May indicates a positive shift in the services sector, driven by increased business activity and new orders, despite ongoing employment challenges.
The market remains focused on the Federal Reserve’s policy decisions, with the services sector showing resilience amid economic uncertainties.
