US service sector unexpectedly contracts in May; inflation heats up
The U.S. services sector contracted for the first time in nearly a year in May while businesses paid higher prices for inputs, a reminder that the economy remained in danger of experiencing a period of very slow growth and high inflation. The Institute for Supply Management (ISM) said on Wednesday its nonmanufacturing purchasing managers index (PMI) dropped to 49.9 last month, the first decline below the 50 mark and lowest reading since June 2024, from 51.6 in April.
Economists polled by Reuters had forecast the services PMI rising to 52.0 following some easing in trade tensions between the United States and China. A PMI reading below 50 indicates contraction in the services sector, which accounts for more than two-thirds of the economy. The ISM associates a PMI reading above 48.6 over time with growth in the overall economy. The ISM on Monday reported that manufacturing contracted for a third straight month in May, with suppliers taking the longest time in nearly three years to deliver inputs amid tariffs. President Donald Trump's import duties, which at times have been implemented in a disorderly manner, have sowed confusion among businesses. Economists say the tariff uncertainty was making it difficult for businesses to plan ahead. Businesses from retailers, airlines to motor vehicle manufacturers have either withdrawn or refrained from giving financial guidance for 2025. While economists do not expect a recession this year, stagflation is on the radar of many. The ISM survey's new orders measure dropped to 46.4 from 52.3 in April, likely with the ebbing of the boost from front-running related to tariffs. Services sector customers viewed their inventory as too high in relation to business requirements, which does not bode well for activity in the near term.
Suppliers' delivery performance continued to worsen. This, together with lengthening delivery times at factories, points to strained supply chains that could drive inflation higher through shortages. Businesses are also seeking to pass on tariffs, which are a tax, to consumers. The ISM survey's supplier deliveries index for the services sector rose to 52.5 from 51.3 in April. A reading above 50 indicates slower deliveries.
A lengthening in suppliers' delivery times is normally associated with a strong economy. Delivery times are, however, likely getting longer because of bottlenecks in the supply chains. That was reinforced by a surge in the survey's measure of prices paid for services inputs to 68.7, the highest level since November 2022, from 65.1 in April. Most economists anticipate the tariff hit to inflation and employment could become evident by summer in the so-called hard economic data. Services sector employment picked up. The survey's measure of services employment rose to 50.7 from 49.0 in April.
The government is expected to report on Friday that nonfarm payrolls increased by 130,000 jobs in May after advancing by 177,000 in April, a Reuters survey of economists showed. The unemployment rate is forecast to hold steady at 4.2%, with greater risks of a rise to 4.3%.
(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama )
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