–ISM Services Index 49.9 Vs. 51.6, Well Below Consensus (52.0)
–ISM’s Miller: Weak PMI Not Indicative of Severe Contraction but Caused by Uncertainty
–Miller: Firms Cautious About Placing Orders Until Trade Tariff Impact Becomes Clearer
By Max Sato
(MaceNews) – The U.S. services sector slipped into contraction in May after growing for 10 months, hit by significantly weaker new orders and rising costs, as stiff tariffs imposed on imports by the Trump administration is causing supply chain chaos, data from the Institute for Supply Management showed Wednesday.
The ISM purchasing managers index, which shows the directional change of economic activity, fell 1.7 percentage points to 49.9 after edging up 0.8 point to 51.6 in April. It is the lowest since 49.2 in June 2024 and much weaker than the consensus call of 52.0 and below its 12-month moving average of 52.3.
The worse-than-expected result “is not indicative of a severe contraction” but it points to uncertainty that is being expressed broadly among services providers, Steve Miller, chair of the ISM Services Business Survey Committee, said in a statement.
The average PMI reading of 50.8 over the last three months still indicates expansion in that period, but it is a notable shift of 2 percentage points below its average of 52.8 over the previous nine months, he said.
Miller told reporters that he is concerned about how sharply new orders and backlogs have fallen, especially alongside a continued rise in prices, which is “a troubling combination.”
The new orders index plunged to contraction for the first time in 11 months (the weakest in more than two years) and Trump tariffs boosted the prices paid index to highest since November 2022, according to the ISM.
“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,” Miller said.
People tend to assume services aren’t affected by tariffs but they are, especially in sectors like utilities, construction and retail where materials like steel and aluminum play a major role, he told reporters.
Services industries import a lot of capital equipment, with long-lead items as they were ordered a year or two ago, Miller noted. “Now that those assets are arriving, they’re hitting new tariff constraints.”
“There’s a lag in tariff effects for services, but it’s real,” he said. “The pain shows up when overseas capital assets ordered years back are delivered and suddenly subject to new cost structures.”
Among the four sub-indexes that directly factor into the services PMI, the business activity/production index: 50.0 in May vs. 53.7, slipping to the lowest since 41.2 in the pandemic era of May 2020. On the make-or-break border line after 59 months of growth.
The new orders index: 46.4 vs. 52.3, the lowest since 45.1 in December 2022. It contracted for the first time since June 2024 (47.8)
The employment index: 50.7 vs. 49.0, returning to expansion after two months of contraction. Comments from respondents include: “Higher scrutiny is being placed on all jobs that need to be filled, whether it be a new position or backfill for an existing role” and “Taking advantage of large company layoffs to hire or promote highly experienced staff to fill knowledge gaps.”
The supplier deliveries index (the only inversed subindex): 52.2. vs. 51.3 vs. 50.6; slower for the sixth month in a row.
Among other subindexes, the prices paid index: 68.7 vs.65.1, its highest since November 2022 (69.4), also the sixth straight above 60 and the 31st in a row below 70.
The inventories index: 49.7 vs. 53.4, the first contraction in four months. Comments from respondents include: “Drawing down inventories for some consumables to delay purchases on some tariffed goods” and “Using existing inventory for sales and not bringing anything inbound.”
The new export orders index: 48.5 vs. 48.6. Respondent comments include: “Moving configuration aspects offshore to avoid tariffs” and “We sell into Canada, and tariffs have reduced those sales to near zero.”
The imports index: 48.2 vs. 44.3 in April, 52.6 in March, contracted for the fourth time in the last five months. Respondent comments include: “Ordered extra various equipment and materials, especially steel pipe, to get ahead of tariffs” and “Reduced demand, higher prices.”