U.S. services sector growth accelerates in May as input cost pressures intensify

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Ciaran Ryan

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U.S. services sector growth accelerates in May as input cost pressures intensify — Services sector heats up

Rising concerns over supply disruptions and cost increases linked to the war with Iran are prompting U.S. services businesses to place orders earlier and rebuild inventories in May. The latest data points to stronger demand across the sector even as price pressures, slower supplier deliveries and muted hiring continue to cloud the outlook.

Highlights

ISM nonmanufacturing PMI rises to 54.5 in May from 53.6 in April, beating expectations and signaling robust services sector expansion.
Services new orders jump to 57.3 and inventories surge to 62.5 as firms rebuild stock amid ongoing input cost pressures and supply disruptions.
Services sector input prices-paid index climbs to 71.3, reflecting war-driven inflation while employment gains slow and markets expect Fed rates to remain at 3.50%-3.75%.

May survey shows stronger orders and inventory rebuilding

As reported by the Institute for Supply Management, its nonmanufacturing purchasing managers index rises to 54.5 in May from 53.6 in April, above economists' forecast of 53.8 in a Reuters poll. A reading above 50 signals expansion in the services sector, which accounts for more than two-thirds of U.S. economic activity.

The pickup in services activity follows a rise in manufacturing activity reported by ISM earlier this week. New orders for services businesses jump to 57.3 from 53.5 in April, while the inventories gauge surges to 62.5 from 53.1 as companies move to guard against shortages and higher prices.

At the same time, growth in backlog orders slows, and exports also ease. Business inventories have been drawn down for four straight quarters, the longest such stretch since the Great Recession, making the latest rebuilding notable for demand planning and supply management.

War-driven cost pressures shape policy and labor outlook

The three-month U.S.-Israel war with Iran is severely disrupting commodity shipping and raising prices for goods including energy, aluminum and fertilizers. That pressure is feeding into the services economy, with the survey's prices-paid measure increasing to 71.3 from 70.7, suggesting the oil price shock continues to spill over into business costs.

Supplier deliveries ease to 55.2 from 56.8 in April, but remain elevated, a sign that delivery times are still lengthening. While such readings can reflect stronger demand in a firming economy, the current increase is also being driven by strained supply chains.

Employment in the services sector remains subdued, and ISM says it is noting an uptick in attrition. Nonfarm payrolls post back-to-back monthly gains above 100,000, but economists in a Reuters survey expect job growth to slow to 85,000 in May from 115,000 in April, with the unemployment rate holding at 4.3%. Financial markets expect the Federal Reserve to keep its benchmark overnight interest rate in the 3.50% to 3.75% range into next year.

Our earlier article on oil prices jumping on renewed Gulf security risks described how Iran’s missile and drone attacks toward Kuwait and Bahrain, followed by U.S. strikes near the Strait of Hormuz, quickly pushed WTI and Brent higher. We noted that with fighting close to a key global shipping chokepoint, markets began pricing in tighter energy supply expectations, higher transport costs, and a fresh wave of inflation pressure.

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