US Services Activity Contracts for First Time in Nearly a Year
Activity at US service providers slipped into contraction territory last month for the first time in nearly a year on an abrupt pullback in demand, while prices accelerated as higher tariffs reverberated across the economy.
The Institute for Supply Management’s index of services dropped 1.7 points in May to 49.9, the group said Wednesday. Readings below 50 indicate contraction, and the latest figure was weaker than all but two projections in a Bloomberg survey of economists.
The steepest contraction in new orders and the highest prices-paid index since late 2022 illustrate a more pronounced impact on demand and inflation as a result of higher US duties on imports.
Treasury yields declined and the S&P 500 pared gains after the ISM data.
The overall index “is not indicative of a severe contraction, but rather uncertainty that is being expressed broadly among ISM Services Business Survey panelists,” Steve Miller, chair of the ISM survey committee, said in a statement. “Respondents continued to report difficulty in forecasting and planning due to longer-term tariff uncertainty and frequently cited efforts to delay or minimize ordering until impacts become clearer.”
A measure of bookings slumped 5.9 points, the most since June 2024, to 46.4. The group’s measure of business activity, which parallels the ISM’s factory output gauge, indicated stagnation — sliding 3.7 points to 50, the weakest reading in five years.
Order backlogs also shrank, with a gauge falling to the lowest level since August 2023.
Eight services industries reported a contraction last month, including retail trade, construction and transportation and warehousing. Ten reported growth, led by accommodation and food services.
In addition to the weakening in demand, service providers experienced higher costs. The prices-paid index jumped to 68.7, the highest level since November 2022.
While service providers reported a decline in stockpiles last month, a measure of inventory sentiment increased nearly 7 points to 62.9 — the highest since July. That indicates more companies see inventories as remaining too high, which risks weighing on manufacturing in coming months.
Combined with data earlier this week showing a third month of shrinking manufacturing activity, the services survey suggests the economy is slowing in the wake of higher US duties and retaliatory tariffs by other countries.
Both ISM indexes of exports and imports showed contraction as companies contend with the repercussions of the Trump administration’s fluid trade policy.
The ISM’s supplier deliveries index rose last month in a sign of longer delivery times as companies work to adjust their supply chains.
The slowdown in demand is also causing service providers to reconsider appropriate staffing levels. The employment index climbed 1.7 points to 50.7, showing limited hiring.
Source: Bloomberg
