Services Surveys Disappoint In May; Employment, New Orders Tumble

Following the decline in Manufacturing survey data (both ISM and PMI in contraction – sub-50), both Services surveys were expected to show improvements in May.

• S&P Global US Services PMI prints 54.9 final for May (missed expectations and down from 55.1 flash print) but higher than the 53.6 in April (highest since April 2022)

• ISM Services prints 50.3 for May missing expectations of a rise to 52.4 from 51.9 – lowest since Dec 2022

Source: Bloomberg

Comparing the two series shows the growing divergence between Services and Manufacturing – spot the odd one out!

Source: Bloomberg

Under the hood, Services employment dropped into contraction as new orders and prices paid slipped lower…

Source: Bloomberg

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said:

“The US continued to see a two-speed economy in May, with the sluggishness of the manufacturing sector contrasting with a resurgent service sector. Businesses in sectors such as travel, tourism, recreation and leisure are enjoying a mini post-pandemic boom as spending is switched from goods to services.

“However, just as demand has moved from goods to services, so have inflationary pressures. While goods price inflation has fallen dramatically in May to register only a marginal increase, prices charged for services continue to rise sharply.

“Although down considerably on last year’s peaks, service sector inflation remains higher than any time in the survey’s 10-year history prior to the pandemic, bolstered by a combination of surging demand and a lack of operating capacity, the latter in part driven by labor shortages.

“However, while rejuvenated service providers will make hay in the summer season, the weakness of manufacturing raises concerns about the economy’s resilience later in the year, when the headwind of higher interest rates and the increased cost of living is likely to exert a greater toll on spending.”

Finally, we note that The S&P Global US Composite PMI Output Index posted 54.3 in May, up from 53.4 in April, to signal the fastest expansion in business activity for just over a year.

The survey data are indicative of GDP growing at an annualized rate of just over 2%, and an upturn in business expectations points to growth remaining robust as we head further into the summer.