| Consensus | Consensus Range | Actual | Previous | |
|---|---|---|---|---|
| Index | 52.0 | 50.5 to 53.7 | 50.3 | 51.9 |
Highlights
Business activity in the US service sector was in positive territory for the fifth straight month in May but the key index slipped to a five-month low as employment remains a mixed bag and faster deliveries point to slower demand, according to the latest survey by the Institute for Supply Management (ISM) released Monday.
Service providers expect slower growth for this year but there are no forecasts for recession at this point, Anthony Nieves, chair of the ISM Services Business Survey Committee, told reporters.
The main index, which shows the directional change of economic activity, fell 1.6 percentage points to 50.3 in May after edging up 0.7 point to 51.9 in April, slipping to 51.2 in March from 55.1 in February, surging 6.0 points to 55.2 in January and plunging 6.3 points to 49.2 in December, which was the first contraction since May 2020, when it registered 45.4.
The index came in much weaker than the median economist forecast of 52.0. It is well above the recent low of 41.7 hit in April 2020 and 40.1 in March 2009, which is the lowest since the inception of the Services PMI in 2008. But it also remains well below the record high of 68.4 reached in November 2021.
"There has been a pullback in the rate of growth for the services sector," Nieves said in a statement."This is due mostly to the decrease in employment and continued improvements in delivery times (resulting in a decrease in the supplier deliveries index) and capacity, which are in many ways a product of sluggish demand."
"The majority of respondents indicate that business conditions are currently stable; however, there are concerns relative to the slowing economy," he said.
Nieves noted that people are still dining out and traveling on vacation but also said that business conditions will have to be monitored for the next few months to assess how sustainable the current pent-up demand emerging after the peak of the pandemic will be.
It is hard to predict services activity over the summer and fall as its patterns have been different in the past three years from the pre-pandemic historical moves, Nieves said.
"We have to see how things pan out over the next few months to get a better idea of what the overall direction is," he said.
"Pent-up demand for services is driving strong revenue performance, but expenses (labor and supplies) continue to put pressure on margins, hindering the financial forecast," a firm from the health care and social assistance industry told the ISM."The overall outlook, however, suggests the forecast is good for the next quarter."
The results of the ISM's semi-annual survey released on May 8 showed that supply management executives at U.S. manufacturers and service providers expect slower growth but"do not indicate a recessionary period," Nieves said.
Of the four sub-indexes that directly factor into the services PMI, growth in business activity remains the slowest in three years; the pace of increase in new orders decelerated; employment indicated its first contraction in five months; and supply deliveries improved, partly reflecting slower demand.
The business activity index posted the fourth straightly monthly drop in May, down 0.5 percentage point at 51.5, after slumping 3.4 points to 52.0 in April from 55.4 in March. The latest figure remains the lowest since the early phase of the global pandemic (41.2 in May 2020 and 26.1 in April 2020).
The new orders index expanded in May for the fifth consecutive month after contracting in December 2022 for the first time since May 2020. The figure of 52.9 is 3.2 percentage points lower than 56.1 seen in April, when the index rose 3.9 points after plunging 10.4 points in March.
The employment index fell below the key 50 line for the first time in five months in May, falling 1.6 points to 49.2, which is the lowest since 49.2 recorded in October 2022. It followed a 0.5-point dip to 50.8 in April, a 2.7-point slump to 51.3 in March and a 4.0-point rise to 54.0 in February. Comments from respondents indicated that some firms are maintaining the same level of staffing amid low profit margins while others are on a hiring freeze until there is a clearer economic outlook.
"Employment has been a mixed bag for the services sector, depending on the industry and the company," Nieves told reporters."It just varies by their particular needs of that point in time, especially (with) the uncertainty that some companies are feeling as to the direction of the overall economy."
The supplier deliveries index -- the only ISM index that is inversed -- registered 47.7 in May, 0.9 point lower than the 48.6 percent recorded in April, when it rose 2.8 points from 45.8 in March. In the last six months, the average reading of 48.0 reflects the fastest supplier delivery performance since June 2009, when the index stood at 46.0. A reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases.
"Supply is plentiful, freight is moving quickly and costs are coming down," a wholesale trader told the ISM."This is a 180-degree change from a year ago. Also, sales demand is down."
Inflationary pressures appear to be easing. The prices index fell 3.4 points to 56.2 in May after edging up 0.1 point to 59.6 in April. The index had dropped 6.1 points in March to 59.5, the lowest since July 2020 (57.5), after falling 2.2 points to 65.6 in February. The index is well below its record high of 83.2 hit in April and February 2022.
The prices for most commodities are"stabilizing" as production of goods for the services sector has increased and supply chains have been improving, Nieves said, adding that there has been a shift back to a buyers' market compared to six months ago, when sellers still had strong pricing power.
"The prices have come down and there more negotiations (between sellers and buyers)," he said."Now with capacity improvements, availability is not a question anymore."
The inventories index jumped 11.1 points to 58.3 in May after slipping 5.6 points to 47.2 in April (a sub-50 figure indicates contraction) and rising 2.2 points to 52.8 in March and 1.4 points to 50.6 in February, which was preceded by eight straight months of contraction.
The index for backlog orders fell 8.8 points to 40.9 in May, falling to the lowest reading since 40.0 in May 2009. The index rose 1.2 points to 49.7 in April from 48.5 in March, when it fell 4.3 points from 52.8 in February. It is the third straight contraction after a previous stretch of 26 months of growth.
Service providers expect slower growth for this year but there are no forecasts for recession at this point, Anthony Nieves, chair of the ISM Services Business Survey Committee, told reporters.
The main index, which shows the directional change of economic activity, fell 1.6 percentage points to 50.3 in May after edging up 0.7 point to 51.9 in April, slipping to 51.2 in March from 55.1 in February, surging 6.0 points to 55.2 in January and plunging 6.3 points to 49.2 in December, which was the first contraction since May 2020, when it registered 45.4.
The index came in much weaker than the median economist forecast of 52.0. It is well above the recent low of 41.7 hit in April 2020 and 40.1 in March 2009, which is the lowest since the inception of the Services PMI in 2008. But it also remains well below the record high of 68.4 reached in November 2021.
"There has been a pullback in the rate of growth for the services sector," Nieves said in a statement."This is due mostly to the decrease in employment and continued improvements in delivery times (resulting in a decrease in the supplier deliveries index) and capacity, which are in many ways a product of sluggish demand."
"The majority of respondents indicate that business conditions are currently stable; however, there are concerns relative to the slowing economy," he said.
Nieves noted that people are still dining out and traveling on vacation but also said that business conditions will have to be monitored for the next few months to assess how sustainable the current pent-up demand emerging after the peak of the pandemic will be.
It is hard to predict services activity over the summer and fall as its patterns have been different in the past three years from the pre-pandemic historical moves, Nieves said.
"We have to see how things pan out over the next few months to get a better idea of what the overall direction is," he said.
"Pent-up demand for services is driving strong revenue performance, but expenses (labor and supplies) continue to put pressure on margins, hindering the financial forecast," a firm from the health care and social assistance industry told the ISM."The overall outlook, however, suggests the forecast is good for the next quarter."
The results of the ISM's semi-annual survey released on May 8 showed that supply management executives at U.S. manufacturers and service providers expect slower growth but"do not indicate a recessionary period," Nieves said.
Of the four sub-indexes that directly factor into the services PMI, growth in business activity remains the slowest in three years; the pace of increase in new orders decelerated; employment indicated its first contraction in five months; and supply deliveries improved, partly reflecting slower demand.
The business activity index posted the fourth straightly monthly drop in May, down 0.5 percentage point at 51.5, after slumping 3.4 points to 52.0 in April from 55.4 in March. The latest figure remains the lowest since the early phase of the global pandemic (41.2 in May 2020 and 26.1 in April 2020).
The new orders index expanded in May for the fifth consecutive month after contracting in December 2022 for the first time since May 2020. The figure of 52.9 is 3.2 percentage points lower than 56.1 seen in April, when the index rose 3.9 points after plunging 10.4 points in March.
The employment index fell below the key 50 line for the first time in five months in May, falling 1.6 points to 49.2, which is the lowest since 49.2 recorded in October 2022. It followed a 0.5-point dip to 50.8 in April, a 2.7-point slump to 51.3 in March and a 4.0-point rise to 54.0 in February. Comments from respondents indicated that some firms are maintaining the same level of staffing amid low profit margins while others are on a hiring freeze until there is a clearer economic outlook.
"Employment has been a mixed bag for the services sector, depending on the industry and the company," Nieves told reporters."It just varies by their particular needs of that point in time, especially (with) the uncertainty that some companies are feeling as to the direction of the overall economy."
The supplier deliveries index -- the only ISM index that is inversed -- registered 47.7 in May, 0.9 point lower than the 48.6 percent recorded in April, when it rose 2.8 points from 45.8 in March. In the last six months, the average reading of 48.0 reflects the fastest supplier delivery performance since June 2009, when the index stood at 46.0. A reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases.
"Supply is plentiful, freight is moving quickly and costs are coming down," a wholesale trader told the ISM."This is a 180-degree change from a year ago. Also, sales demand is down."
Inflationary pressures appear to be easing. The prices index fell 3.4 points to 56.2 in May after edging up 0.1 point to 59.6 in April. The index had dropped 6.1 points in March to 59.5, the lowest since July 2020 (57.5), after falling 2.2 points to 65.6 in February. The index is well below its record high of 83.2 hit in April and February 2022.
The prices for most commodities are"stabilizing" as production of goods for the services sector has increased and supply chains have been improving, Nieves said, adding that there has been a shift back to a buyers' market compared to six months ago, when sellers still had strong pricing power.
"The prices have come down and there more negotiations (between sellers and buyers)," he said."Now with capacity improvements, availability is not a question anymore."
The inventories index jumped 11.1 points to 58.3 in May after slipping 5.6 points to 47.2 in April (a sub-50 figure indicates contraction) and rising 2.2 points to 52.8 in March and 1.4 points to 50.6 in February, which was preceded by eight straight months of contraction.
The index for backlog orders fell 8.8 points to 40.9 in May, falling to the lowest reading since 40.0 in May 2009. The index rose 1.2 points to 49.7 in April from 48.5 in March, when it fell 4.3 points from 52.8 in February. It is the third straight contraction after a previous stretch of 26 months of growth.
Market Consensus Before Announcement
After a nearly as-expected 51.9 in April, the ISM services index in May is expected to hold steady at 52.0.
Definition
Producing a monthly composite on general activity tracked in volumes, the Institute for Supply Management surveys several hundred service-providing firms from 16 industries (construction and mining are included). The services composite index has four equally weighted components: business activity (closely related to a production index), new orders, employment, and supplier deliveries (also known as vendor performance). The first three components are seasonally adjusted but the supplier deliveries index does not have statistically significant seasonality and is not adjusted. For the composite index, a reading above 50 percent indicates that the services economy is generally expanding; below 50 percent indicates that it is generally declining. The supplier deliveries component index requires extra explanation: a reading above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries.
Description
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM services index, investors will know what the economic backdrop is for the various markets. The services index is a composite of four equally weighted components: business activity, new orders, employment, and supplier deliveries. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly -- and causing potential inflationary pressures. While the ISM manufacturing index has a long history that dates to the 1940s, this report goes back to 1997. Note that in 2020 the ISM changed the name of the report to services from non-manufacturing though it continues to track two key goods producing industries: construction and mining.
