U.S. Services Sector Expands in May, Reaching 54.5 Amid Rising Prices

The U.S. services sector experienced an acceleration in growth during May, with the ISM Non-Manufacturing Index rising to 54.5. This figure exceeded the consensus expectation of 53.8 and indicates the 23rd consecutive month of expansion for the sector, which accounts for approximately two-thirds of the nation's economic activity. A reading above 50 signals expansion, while a reading below 50 indicates contraction.

The uptick in the index was primarily fueled by increases in both business activity and new orders. The business activity index rose to 57.7 from 55.9 in April, and the new orders index increased to 57.3 from 53.5. Both of these key measures have consistently shown expansion over the past twelve months. Despite this robust growth, the sector is contending with the fastest pace of price increases since 2022. The prices paid index climbed to 71.3 in May from 70.7 in April, reaching its highest level since August 2022.

Broad-based growth characterized May's performance, with seventeen out of eighteen major service industries reporting expansion. Only the Real Estate sector experienced a contraction. While the new orders index rebounded in May, it followed a significant decline from a three-year high of 60.6 recorded in March, highlighting some volatility within the sector.

Despite the solid pace of expansion, survey comments reveal lingering caution regarding the global economic landscape. Businesses reported inflationary pressures stemming from supply chain disruptions and elevated fuel costs, impacting certain product categories. Consequently, many service companies are postponing internal projects until greater stability emerges. Furthermore, hiring efforts have stalled, with the employment index declining slightly to 47.9 in May from 48.0 in April, after briefly expanding earlier this year. This marks a return to contraction for the employment index.

Although the prices paid index is at its highest level since August 2022, it remains below the peak levels observed during the COVID-19 supply-chain disruptions, which saw the index in the low 80s. The full impact of recent geopolitical events on input prices, specifically the war in Iran, remains a short-term concern. Analysts will continue to monitor the M2 money supply, which has exhibited slow growth over the past three years, to assess the potential for long-term inflationary pressures. In other economic news for May, sales of cars and light trucks reached an annual rate of 16.1 million units, representing a 1.0% increase from April and a 2.7% rise compared to the previous year.

Key terms

1. **ISM Non-Manufacturing Index**: A monthly economic indicator based on a survey of purchasing and supply management executives in over 400 non-manufacturing companies. It measures the health of the services sector, with readings above 50 indicating expansion and below 50 indicating contraction.

2. **M2 Money Supply**: A broad measure of the money supply that includes cash, checking deposits, nearly all savings deposits, and money market accounts. Its growth rate is often monitored as an indicator of potential inflationary pressures.

3. **Prices Paid Index**: A sub-index of the ISM surveys that measures the prices businesses are paying for inputs and materials. An increasing index suggests rising inflation for goods and services purchased by the sector.