Services economy activity returns to growth mode in May, reports ISM

After a 15-month growth run, for the services economy, halted in April, growth resumed once again in May, according to the new edition of the Services ISM Report on Business, which was issued today by the Institute for Supply Management (ISM).

The May Services PMI, at 53.8 (a reading of 50 or higher signals growth), was up 4.4% over April’s 49.4, which marked the first time the Services PMI contracted since December 2022, when it came in at 49 and prior to that the last month seeing contraction was in May 2020, when it came in at 45.4.

The May Services PMI is 1.3% above the 12-month average of 52.5, with August 2023’s 54.1 marking the high for that period and April’s 49.4 reading marking the low for that period.

ISM reported that 13 services sectors it tracks saw gains in May, including: Real Estate, Rental & Leasing; Health Care & Social Assistance; Other Services; Educational Services; Utilities; Wholesale Trade; Construction; Transportation & Warehousing; Public Administration; Management of Companies & Support Services; Finance & Insurance; Information; and Professional, Scientific & Technical Services. The five sectors with decreases, including: Retail Trade; Agriculture, Forestry, Fishing & Hunting; Arts, Entertainment & Recreation; Accommodation & Food Services; and Mining.

The report’s equally weighted subindexes that directly factor into the NMI were largely positive from April to May, including:

• Business Activity/Production, at 61.2, up 10.3%, growing, at a faster rate, for the 48^th consecutive month, hitting its highest reading since November 2022, at 61.2, with 13 services sectors reporting growth;
• New Orders, at 54.1, up 1.9%, growing, at a faster rate, for the 17^th consecutive month, since contracting in December 2022, which was preceded by 30 straight months of growth, with 10 sectors reporting growth;
• Employment, at 47.1, was up 1.2%, contracting, at a slower rate, for the fourth consecutive month, with seven sectors reporting growth;
• Backlog of orders, at 50.8, fell 0.3%, growing, at a slower rate, for the second consecutive month, with seven sectors reporting growth;
• Supplier Deliveries, at 52.7, (a reading above 50 indicates slower deliveries), were up 4.2% from April, slowing after three months of growth, with four sectors reporting slower deliveries;
• Prices, at 58.1, decreased 1.1%, increasing, at a slower rate, for the 84th consecutive month, with 14 sectors reporting higher prices; and
• Inventories, at 52.1, down 1.6%, growing, at a slower rate, for the second straight month, with six sectors reporting higher inventories

Comments from ISM member panelists included in the report highlighted various issues being seen in the services sector.

“The last month has brought a level of stability not seen is some time,” said an Accommodation & Food Services panelist. “Recent news of the Biden administration’s tariff actions is of high concern on disruption, with little information on the exclusion process when it comes to which materials and products will actually be impacted.”

And a Transportation & Warehousing panelist said that, in general, business has been steady, with hiring slowing, and prices slightly climbing.

Tony Nieves, Chair of the ISM’s Services Business Survey Committee, said in an interview, that it was encouraging to see so many services industry sectors see growth in May.

“Because we are measuring directional change and the fact that the baseline was lowered from April, any increase is going to be reflective of growth from where things were in the prior month,” he said. “There was concern about where things were going after contraction in April, but one month does not make a trend. Things popped back up in May and would have been even better if employment had been stronger. Employment is still lagging, and respondents were still cautious about not only back filling positions, but it remains a mixed bag, in terms of finding applicable workers for certain roles within companies. There remains a combination of managing variable expenses while not having the labor pool or resources.”

Based on the report’s findings, coupled with panelists’ sentiment and the ISM’s Semiannual Forecast pointing to a stronger second half of the year, Nieves explained that remains intact, as there are certain industries that have yet to grow this year but tend to see growth as the year goes on, as the months get warmer and people go on vacation.

“I still think we will see this steady incremental growth moving forward for services,” he said.