Business activity in the US services sector posted a sharp rebound in May, backed by new orders, after unexpectedly slipping into contraction to end 15 months of growth in April, but more firms are expressing concerns that high borrowing costs are hindering capital investment, according to the latest survey by the Institute for Supply Management (ISM).

The ISM index, which shows the directional change of economic activity, jumped 4.4 percentage points to a nine-month high of 53.8 in May after falling 2.0 points to a 16-month low of 49.4 in April for a third straight monthly drop. The index came in much stronger than the median economist forecast of 50.7 and above its 12-month average of 52.5.

"The increase in the composite index in May is a result of notably higher business activity, faster new orders growth, slower supplier deliveries and despite the continued contraction in employment," Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement."Survey respondents indicated that overall business is increasing, with growth rates continuing to vary by company and industry. Employment challenges remain, primarily attributed to difficulties in backfilling positions and controlling labor expenses."

"The majority of respondents indicate that inflation and the current interest rates are an impediment to improving business conditions," he said, adding the rate policy concern to the list as seen in the ISM May manufacturing survey released Monday.

Nieves told reporters that he expects the services sector to show"incremental growth" into the summer due to the holiday season and vacation time.

Of the four sub-indexes that directly factor into the services PMI, the business activity index jumped 10.3 points to an 18-month high of 61.2 in May after plunging 6.5 points to a nearly four-year low of 50.9 in April, which was below 52.9 recorded in May and 53.3 in April 2023 and the lowest since 41.2 in May 2020, when the pandemic caused a global slump. The new orders index rose 1.9 points to 54.1 after falling 2.2 points to a 16-month low of 52.2. It is still below a recent high of 56.1 seen in February but indicates expansion for the 17th consecutive month.

The employment index showed contraction for the fourth month in a row. It rose 1.2 points to 47.1 in May after falling 2.6 points to a four-month low of 45.9 in April.

The supplier deliveries index -- the only ISM index that is inversed -- rose 4.2 points to 52.7 after rising 3.1 points to 48.5 in April and falling 3.5 points to a record low of 45.4 in March, which was the fastest deliveries since July 1997, when the ISM began tracking them. The index showed the first expansion in four months, indicating that supplier delivery performance was"slower" after being"faster." A reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases.

In other details, the inventories index showed growth for the second straight month but it fell 1.6 points to 52.1 after surging 8.1 points to 53.7 in April and falling 1.5 points to 45.6 in March, which was the lowest since 45.1 in December 2022. The prices paid index remains elevated. It fell 1.1 points to 58.1 after rising 5.8 points to 59.2 in April and falling 5.2 points to a four-year low of 53.4 in March, which was the lowest since 50.4 in March 2020 and well below its record high of 83.8 hit in March 2022. The index has been above the neutral line of 50 for seven years since 49.6 in May 2017.

ISM services fell to 2 points in April to a much lower-than-expected 49.4 that ended a yearlong run in the mid-to-low 50s. May's consensus is a rebound to 50.7.

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.

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.