The Institute for Supply Management Services Report on Business indicated economic activity in the services sector contracted in May for the first time since June 2024, with retail among the businesses seeing a decline.
The poll of purchasing and supply executives in the United States fell into contraction for only the fourth time in 60 months since recovery from the COVID-19 pandemic-induced recession that began in June 2020.
ISM’s Purchasing Managers Index fell to 49.9%, just below the 50-percent breakeven point between expansion and contraction. In the report, Steve Miller, chair of the ISM Services Business Survey Committee, noted the PMI registered 1.7 percentage points lower than the April figure of 51.6%.
In a review of the categories covered in the report, results were mixed.
“The Business Activity Index was unchanged in May, registering 50%, 3.7 percentage points lower than the 53.7% recorded in April,” Miller stated. “This is the index’s first month out of expansion territory since May 2020. The New Orders Index dropped into contraction territory in May, recording a reading of 46.4%, a decrease of 5.9 percentage points from the April figure of 52.3%. The Employment Index returned to expansion after two months in contraction. The reading of 50.7% is 1.7 percentage points higher than the 49% recorded in April and is the second straight month-over-month gain. The Supplier Deliveries Index registered 52.5%, 1.2 percentage points higher than the 51.3% recorded in April. This is the sixth consecutive month that the index has been in expansion territory, indicating slower supplier delivery performance.”
The Supplier Deliveries is the only ISM Report On Business index that is inversed, as a reading above 50% indicates slower deliveries, which is typical as the economy improves and customer demand increases.
“The Prices Index registered 68.7% in May, a 3.6-percentage point increase from April’s reading of 65.1%,” Miller pointed out. “The index has elevated 7.8 percentage points in the last two months to reach its highest level since November 2022: 69.4%. This is the first time the index has recorded this high of a two-month increase since a 9.2-percentage-point gain in February and March 2021. The May reading is also its sixth in a row above 60%. The Inventories Index returned to contraction territory in May, registering 49.7%, a decrease of 3.7 percentage points from April’s figure of 53.4%. This is the second time the index has contracted in 2025. The Inventory Sentiment Index expanded for the 25th consecutive month, registering 62.9%, up 6.8 percentage points from April’s figure of 56.1%, and its highest reading since July 2024: 63.2%. The Backlog of Orders Index registered 43.4% in May, a 4.6-percentage point decrease from the April figure of 48%, indicating contraction for the ninth time in the last 10 months and its lowest reading since August 2023: 41.8%.”
In evaluating the poll results, Miller maintained, “May’s PMI level is not indicative of a severe contraction but rather uncertainty that is being expressed broadly among ISM Services Business Survey panelists. The average reading of 50.8% over the last three months still indicates expansion in that time period, but it is a notable shift of two percentage points below its average of 52.8% over the previous nine months. The New Orders Index moved into contraction territory for the first time in nearly a year. Tariff impacts are likely elevating prices paid by services sector companies, with the Prices Index hitting its highest level since November 2022, when the Bureau of Labor Statistics’ CPI indicated that prices had increased 7.1% as compared to November 2021. 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.”
In May, 10 services industries reported growth: Accommodation and Food Services; Arts, Entertainment and Recreation; Public Administration; Mining; Utilities; Educational Services; Real Estate, Rental and Leasing; Information; Health Care and Social Assistance, and Professional, Scientific and Technical Services. At the same time eight industries experienced contraction in May: Other Services; Retail Trade; Management of Companies and Support Services; Agriculture, Forestry, Fishing and Hunting; Finance and Insurance; Construction; Transportation and Warehousing, and Wholesale Trade.
Manufacturing sector economic activity contracted in May for the third consecutive month. The contraction followed a two-month expansion preceded by 26 straight months of contraction, according to the latest Manufacturing ISM Report On Business. The Manufacturing PMI slipped to 48.5% in May from the 48.7% recorded in April. Overall economic expansion continued for the 61st month after one month of contraction in April 2020, as a Manufacturing PMI above 42.3% maintained over time generally indicates an expansion of the overall economy.
Seven manufacturing industries reported growth in May: Plastics and Rubber Products; Nonmetallic Mineral Products; Petroleum and Coal Products; Furniture and Related Products; Electrical Equipment, Appliances and Components; Fabricated Metal Products, and Machinery. Seven industries reported a May contraction: Paper Products; Wood Products; Printing and Related Support Activities; Food, Beverage and Tobacco Products; Transportation Equipment; Chemical Products, and Primary Metals.
