US services sector activity decelerated to the brink of contraction in May, in what counted as a surprisingly cool read on the driver of the world’s largest economy.
At 50.3, ISM services printed well below consensus, missing the lowest estimate from five-dozen forecasters in the process. The range was 50.5 to 53.7.
It was the weakest headline reading since December and, more importantly, the second-weakest since the earliest days of the pandemic.
Meanwhile, the final read on S&P Global’s services sector PMI for May told a different story. At 54.9, it was mostly unchanged from the flash print and represented the “strongest upturn in business activity for over a year” amid improving demand.
As ever, there’s no utility in trying to reconcile the two surveys. In some ways, they’re not entirely comparable, and in any case the market will almost always be more sensitive to ISM. May marked the third straight month of ISM as the pessimist.
Key underlying measures in the ISM survey receded, with new orders falling to 52.9 from 56.1 and employment slipping below the 50 demarcation line to match the lowest reading since October. Delivery performance was the fastest since June of 2009 which played a role.
“There has been a pullback in the rate of growth for the services sector… due mostly to the decrease in employment and continued improvements in delivery times and capacity, which are in many ways a product of sluggish demand,” ISM’s Anthony Nieves said Monday.
Two anecdotes from panelists captured the mood. “Everything seems to have leveled off: Not getting any worse, not getting any better,” someone in Professional, Scientific & Technical Services remarked. “Overall business is good, and there has not been a significant change in direction,” a respondent in retail said, echoing the sentiment.
The good news from slower demand is disinflation. The prices gauge fell to 56.2, the lowest since May of 2020.
Taken with the sharp drop in the factory prices paid index reported alongside another contractionary print on ISM manufacturing last week, you can make the case that price pressures are now abating across the board.
Only not if you go by S&P Global’s report. “Just as demand has moved from goods to services, so have inflationary pressures,” Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said, adding that “rejuvenated service providers will make hay in the summer season.”
Williamson did caution that the readily apparent manufacturing malaise, should it persist, could ultimately undermine the “resilient” characterization so often applied to the US economy, and alluded to the prospect that consumers will eventually succumb to the more onerous cost of living.
Again, there’s no use trying to reconcile the ostensibly conflicting messages from the two surveys. Either way, the bottom isn’t falling out, and betting against the US services sector is tantamount to betting against America’s notorious spendthrifts who can most assuredly stay irrational longer than you can stay solvent.
