US Services Activity Expands For Fifth Month, But Shows Softening Demand

The ISM Services PMI declined from 51.9 in April 2023 to 50.3 in May, well below market expectations of 52.2, but still indicating the fifth consecutive month of expansion in the service sector.

Simultaneously, the final S&P Global Services PMI reading for May was revised slightly down from an earlier estimate of 55.1 to 54.9. 

May ISM Services PMI: Key Takeaways

  • The overall index fell from 51.9 to to 50.3, falling short of economist expectations of 52.2.
  • Among different subindices, new orders fell from 56.1 to 52.9, while new export orders fell from 60.9 to 59, still indicating expansion but a slower pace.
  • Business activity edged down slightly from 52 to 51.5.
  • Backlog of orders contracted further from 49.7 to 40.9. 
  • Inventory sentiment saw a notable rise of 12.1 points to 61. 
  • Prices paid fell from 59.6 to 56.2. 
  • Employment signalled contracting conditions (49.2), down from an expansion (59.8) in April.
  • “There has been a pullback in the rate of growth for the services sector. This is due mostly to the decrease in employment and continued improvements in delivery times (resulting in a decrease in the Supplier Deliveries Index) and capacity, which are in many ways a product of sluggish demand,” said Anthony Nieves, chair of the ISM Services Business Survey Committee. 

Market Reactions

The S&P 500, which is tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY), ticked down by 0.15%. 

The dollar dipped, with Invesco DB USD Index Bullish Fund ETF (NYSE:UUP) down 0.3%.

Market-implied expectations of the Fed keeping rates unchanged in June rose from 75% to 82%.

Chart: US Dollar Index’s Reaction To ISM Services PMI

Benzinga’s Take: The expansion of services activity for the fifth consecutive month demonstrates the U.S. economy’s resilience, even in the face of high interest rates. Yet he pace of growth is showing the first signs of cooling. The Federal Reserve now starts to face a difficult trade-off between still-persistent inflation and slowing demand in the economy. 

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Photo via Shutterstock.