The ISM Services PMI index pulled back to 50.3 in May from 51.9 in April. This falls well short of the 52.4 percent reading consensus was expecting. This is the fifth consecutive month of expansion for the services sector, but optimism has been steadily eroding since late 2022.
In line with the headline measure, the business activity sub-index cooled to 51.5, down from 52.0 in April.
The new orders fell 3.2 percentage points (pp) to 52.9, giving back most of April’s gains and is now slightly higher than the 52.2 print in March. The new orders index is well below its 62.6 peak from February and reflects a significant moderation in growth.
The prices paid component fell again to 56.2 in May. This is the lowest reading since May 2020 and even below the average prints recorded in the 2017-2019 period before the pandemic.
Supplier delivery times registered 47.7, down from 48.6 in April, while the backlog of orders index plummeted 8.8 points to 40.9.
The employment sub-component tumbled into contractionary territory, and at 49.2 is at its lowest level since October 2022.
Eleven out of 18 industries expanded in May, down from fourteen in April.
Key Implications
May’s services sector update reflects an economy that is gradually slowing down. Similar to the manufacturing sector’s update last week, backlogs and supplier delivery times continue to improve as demand growth slows. The degree of improvement in supplier delivery times since February were last seen at the tail end of the recession during the Global Financial Crisis.
Taken with the ISM Manufacturing report from last week, businesses are signaling slowing demand growth. Combining this with improving supply chain conditions and easing price pressures, the Fed has some reassurance that the fight against inflation is gradually progressing – despite persistently strong jobs growth in the Nonfarm Payrolls Report.
