The U.S. services sector experienced an uptick in activity in May, driven by businesses placing orders and replenishing inventories in anticipation of shortages and increased prices linked to the ongoing conflict with Iran. The Institute for Supply Management (ISM) reported that its nonmanufacturing purchasing managers index (PMI) rose to 54.5, up from 53.6 in April, surpassing economists’ expectations of 53.8. A PMI reading above 50 indicates growth in the sector, which constitutes over two-thirds of the U.S. economy.
Impact of the U.S.-Iran Conflict
The three-month U.S.-Israel conflict with Iran has significantly disrupted the shipping of commodities, leading to higher prices for goods such as energy, aluminum, and fertilizers. This situation has prompted businesses to act preemptively to mitigate the impact of these disruptions. The rise in the services PMI aligns with an increase in manufacturing activity reported by the ISM earlier this week.
New orders in the services sector surged to 57.3 from 53.5 in April, while the inventory gauge jumped to 62.5 from 53.1. This marks the longest period of inventory drawdowns since the Great Recession, spanning four consecutive quarters. However, growth in backlog orders and exports has slowed.
Inflation and Economic Outlook
The survey indicated that prices paid by businesses for inputs increased to 71.3 from 70.7, suggesting that the oil price shock will continue to affect the services sector. Inflation reached its highest pace in three years in April, as reported by the government last week. Financial markets anticipate that the Federal Reserve will maintain its benchmark overnight interest rate between 3.50% and 3.75% into the next year.
Supplier delivery times eased slightly to 55.2 from 56.8 in April, though they remain elevated. This contributes to the rise in the services PMI, reflecting both strengthening economic demand and ongoing supply chain strains.
Employment in the services sector remains subdued, with the ISM noting an increase in attrition. The ISM employment gauge has not been a reliable predictor of private services payrolls in the Labor Department’s employment report, which has shown nonfarm payroll gains exceeding 100,000 for two consecutive months. Economists predict payrolls increased by 85,000 jobs in May, following a rise of 115,000 in April, with the unemployment rate expected to hold steady at 4.3%.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
