ISM Survey: U.S. Service Sector Unexpectedly Contracts in May, Inflation Heats Up

On June 4th: In May, the U.S. service sector witnessed its first contraction in nearly a year. Businesses encountered rising input prices, suggesting that the U.S. economy may still be faced with a period of very slow growth and high inflation. The Institute for Supply Management (ISM) stated on Wednesday that the U.S. non-manufacturing PMI dropped to 49.9, falling below the 50 mark for the first time since June 2024 and reaching its lowest level. The new order index decreased from 52.3 in April to 46.4, probably due to the weakening boost from tariff-related lead time advantages. Service sector customers think that inventories are too high compared to demand, which is not a favorable sign for short-term economic activity. Supplier delivery performance continued to worsen, and extended factory lead times indicated supply chain stress. This stress could lead to higher inflation due to supply shortages. Businesses are also trying to pass on tariffs to consumers. The services input price index soared from 65.1 in April to 68.7, the highest level since November 2022, further strengthening this trend. Most economists anticipate that the impact of tariffs on inflation and employment will be reflected in the so-called hard economic data during the summer.