U.S. Service Sector Contracts 0.1% in May Amid Inflation Concerns

The U.S. service sector experienced an unexpected contraction in May, marking the first decline in nearly a year. According to the Institute for Supply Management (ISM), the non-manufacturing PMI fell to 49.9, dipping below the 50 mark for the first time since June 2024. This decline indicates a slowing pace of growth in the service sector, which is a critical component of the U.S. economy.

The new orders index, a key indicator of future demand, dropped from 52.3 in April to 46.4. This significant decrease suggests that the initial boost from tariff-related lead time advantages is waning, leading to a reduction in new orders. Customers in the service sector are expressing concerns about high inventory levels relative to demand, which is not a positive sign for short-term economic activity.

Supplier delivery performance continued to deteriorate, with extended factory lead times indicating ongoing supply chain stress. This stress could exacerbate inflationary pressures due to supply shortages. Businesses are attempting to pass on these increased costs to consumers, as evidenced by the surge in the services input price index from 65.1 in April to 68.7, the highest level since November 2022. This trend reinforces the notion that inflation is heating up, posing challenges for both businesses and consumers.

The contraction in the service sector coincides with rising inflation, creating a challenging economic environment. The increase in the prices paid index, which measures the cost of inputs, signals that businesses are facing higher costs. This could lead to increased prices for consumers, further complicating the economic landscape. Policymakers will need to carefully monitor these developments and consider appropriate measures to support economic growth while managing inflationary pressures.

The unexpected contraction in the service sector raises concerns about potential headwinds for the U.S. economy. The decline in new orders and the increase in input costs could lead to a slowdown in economic activity, with implications for employment and consumer spending. Policymakers must closely monitor these developments and consider measures to support economic growth. Addressing inflationary pressures is crucial, as rising costs could further dampen economic activity.