Services sector activity contracts in May after 10 months of growth, reports ISM

Coming off of 10 consecutive months of growth, services sector activity contracted in May, according to the new edition of the Services ISM Report on Business, which was released today by the Institute for Supply Management (ISM).

The May Services PMI, at 49.9 (a reading of 50 or higher signals growth), fell 1.7% from April’s 51.6 reading. Prior to May, the Services PMI had seen growth in 56 of the previous 59 months, going back to the initial recovery from the pandemic in June 2020. And May’s reading was 4.4% below the 12-month average of 52.3, with October’s 55.8 and June 2024’s 49.2 marking the respective high and low readings over that period.

ISM reported that 10 of the services sectors it tracks saw growth in May, including: Accommodation & Food Services; Arts, Entertainment & Recreation; Public Administration; Mining; Utilities; Educational Services; Real Estate, Rental & Leasing; Information; Health Care & Social Assistance; and Professional, Scientific & Technical Services. Services sectors seeing contraction in May included: Other Services; Retail Trade; Management of Companies & Support Services; Agriculture, Forestry, Fishing & Hunting; Finance & Insurance; Construction; Transportation & Warehousing; and Wholesale Trade.

The report’s subindexes that factor into the NMI were mixed from April to May, including:

• Business Activity/Production: at 50.0, down 3.7% from April, directionally unchanged after 59 months of growth, with 12 sectors reporting an increase in business activity;
• New Orders, at 46.4, fell 5.9% off of April’s 52.3 reading (its highest since December), contracting for the first time since June 2024, when it came in at 47.8, with six sectors reporting growth;
• Employment, at 50.7, increased 1.7%, growing after contracting in April, with seven sectors reporting growth; and
• Supplier Deliveries, at 52.5 3 (a reading above 50 indicates slower deliveries), was up 1.2% over April, with 11 sectors reporting slower deliveries

Comments from ISM member panelists included in the report highlighted various trends in the services sector, with tariffs again receiving a fair amount of attention.

“Tariff variability has thrown residential construction supply chains into chaos,” said a Construction panelist. “Many items are still manufactured in southeast Asia, and suppliers are beginning to test the waters for increases. Major heating, ventilation and air conditioning equipment manufacturers are passing on their cost increases due to higher refrigerant and steel commodity prices. Planning is difficult for community projects that could be scheduled for the next 22 to 30 months.”

And an Information sector panelist noted that tariffs remain a challenge, as it is not clear what duties apply, stating that the best plan is still to delay decisions to purchase where possible.

In an interview, Steve Miller, Chair of the ISM Services Business Survey Committee, said that in looking at the May Services PMI reading, it helps to look at the Service PMI readings on a sector-specific basis.

“We have 57% of the industries representing GDP currently in expansionary territory, which is higher than each of the last two months,” he said. “And we also saw a reduction in those [sectors] saying they are in contraction territory for the same period. What we saw in terms of what created the shift was in the hospitality and food services and also in the real estate, rental and leasing both being still in expansionary territory, but not as high as they were the last two months so that and that created the entire shift [to contraction].”

Looking at specific May readings, Miller cited that seeing Employment in expansion territory after two months of contraction, while New Orders contract and Backlog of Orders [down 4.6%, to 43.4, and contracting, at a faster rate for the third straight month] dropping faster, that signals a level of confidence by business leaders to stay the course. He also observed that when looking at the combined average of New Orders and Backlog of Orders, at 44.9, the only other time in the last 20 years that average was below 45 was in April and May 2020, during the depths of the pandemic, and in the 2008-2009 timeframe, during the financial crisis.

That takeaway, he explained, in a way, puts what he called “an exclamation point” in regards to the ongoing tariff-driven uncertainty.

Addressing May’s slower Supplier Deliveries, Miller explained that is being driven by suppliers who are uncertain enough about the future that they're slowing down production, which is going create longer lead times for inputs.

“We saw that during the pandemic, with the spike in inflation that came with the pressure of getting more supply when supply was constrained,” he said. “That together with the Prices index [up 3.6%, to 68.7, growing, at a faster rate, for the 96^th consecutive month] is not a burning fire, but I am certainly smelling some smoke over there. The longer it takes to resolve some of the tariff issues, the more risk there is that we are going to be supply-constrained—and for those importing products, that is really going to be a much more significant impact, because they will all be fighting for that same inventory and that will drive their specific prices up. I don’t know if that will be inflationary or not, because we don’t know what’s going to happen with the money supply yet.”

When asked to describe the overall state of the services sector on a year-to-date basis, Miller said that, in hindsight, it is declining growth, akin to what was seen during the December to May period a year ago, which saw nearly the same percentage decline year-over-year. In terms of revenues, he noted that whereas the ISM’s December Semiannual Report forecasted a 5% revenue gain in 2025, that projection has subsequently shifted to flat growth.