The U.S. services sector, often considered the lifeblood of the American economy, has shown unexpected signs of weakness in May, according to the latest report from the Institute for Supply Management (ISM). This contraction marks a significant reversal after 10 consecutive months of expansion and has raised concerns about broader economic stability.
Key Data: PMI Dips Below Critical Threshold
The services Purchasing Managers' Index (PMI) fell to 49.9 in May, down 1.7 percentage points from April's 51.6 reading. This decline below the 50-point threshold - which separates expansion from contraction - represents the first negative reading since June 2024 and breaks a streak of 56 months of growth out of the past 59 months.
More concerning is the sharp drop in new orders, which plunged 5.9 percentage points to 46.4 - the first contraction in this critical forward-looking indicator since June 2024. The backlog of orders index also fell sharply to 43.4, marking its third consecutive month of accelerating contraction.
Sector Divergence: Winners and Losers
The report revealed significant divergence among different service industries:
Growing sectors (10 total):
- 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
- Professional, scientific and technical services
Contracting sectors (8 total):
- Other services
- Retail trade
- Company management and support services
- Agriculture, forestry, fishing and hunting
- Finance and insurance
- Construction
- Transportation and warehousing
- Wholesale trade
Underlying Indicators Show Mixed Signals
The business activity/production index registered exactly 50.0, down 3.7 percentage points from April, indicating stagnant activity after 59 months of growth. Meanwhile, the employment index showed resilience at 50.7, rebounding from April's contraction.
Supplier deliveries slowed (52.5), suggesting potential supply chain bottlenecks, while the prices index rose to 68.7, continuing a 96-month streak of increases.
Expert Analysis: Tariffs and Uncertainty Blamed
ISM survey respondents highlighted tariff-related uncertainty as a major challenge. A construction industry executive reported: "Tariff uncertainty has thrown the residential construction supply chain into chaos. Many products still manufactured in Southeast Asia are seeing tentative price increases from suppliers."
Steve Miller, chair of the ISM Services Business Survey Committee, noted that while 57% of tracked industries (representing GDP) remain in expansion, the slowdown was driven primarily by reduced growth in accommodation/food services and real estate sectors.
Miller warned that the combination of new orders and backlogs (averaging 44.9) has only fallen below 45 during three periods in the past 20 years: the peak pandemic months of April-May 2020 and during the 2008-09 financial crisis.
Economic Implications
The services sector contraction raises concerns about broader economic weakness, particularly given its dominant position in the U.S. economy. While employment remains stable for now, continued softness in new orders suggests potential future job market impacts.
Experts suggest the data may prompt policymakers to address tariff uncertainties and consider measures to stimulate demand. Businesses are advised to focus on supply chain resilience and cost management as they navigate an increasingly challenging environment.