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Report On Business® Roundup: May Services PMI®

June 04, 2025
By Dan Zeiger

Last month, this space indicated that, while the Services ISM® Report On Business® and the large swath of the U.S. economy it measures has displayed resiliency in the wake of trade war alarm bells ringing, that doesn’t mean the sector is immune.

That warning sign was justified by the release of the Services PMI® data for May. The composite index reading of 49.9 percent indicated contraction for the first time in 11 months, and while the tariffs turbulence impact on the subindex numbers was not as pronounced as in ISM’s Manufacturing report earlier this week, unease was clearly evident.

“People typically think of as services as restaurants and hospitality, getting your car serviced and potentially IT,” Steve Miller, CPSM, CSCP, Chair of the Institute for Supply Management® (ISM®) Services Business Survey Committee, told a conference call of reporters on Wednesday. “But when you do a deep dive into industries like Utilities, Construction, Wholesale Trade and Retail Trade, they use physical products, and there’s a lot of inventory.”

He added, “I think the assessment that’s there’s some insulation (from tariffs) is valid, but specifically in in some of the big industries like Real Estate, Rental & Leasing (RER&L) that buy capital equipment that is leased out to customers, it’s going to have an impact.”

While RER&L, the largest services industry in terms of share of sector gross domestic product (GDP), reported growth in May, Retail Trade, Construction and Wholesale Trade contracted. And  Services Business Survey panelists’ comments the last two months indicated that companies have been especially impacted by tariffs on steel and aluminum imports, which were recently doubled by the Trump administration.

The New Orders Index reading of 46.4 percent, a 5.9-percentage point decrease from April, is the first in contraction territory since June 2024. The Business Activity Index registered 50 percent (for an “unchanged” status), out of expansion territory for the first time in 60 months. The Backlog of Orders (43.3 percent, down 4.6 points) and Imports (48.2 percent) indexes affirmed sluggish demand.

Miller did some sobering math: “The average of the New Orders and Backlog of Orders indexes is currently 44.9 percent,” he said. “The only times that this average has been below 45 in the last 20 years has been at the beginning of the (coronavirus) pandemic in April and May 2020 and in the 2008 and ’09 timeframe, during the Great Recession.”

As a result, the Supplier Deliveries Index reading of 52.5 percent (in expansion territory, which indicates longer lead times) is indicative of supply chain bottlenecks, not a rush of buying. The Prices Index elevated to 68.7 percent, its sixth straight reading above 60 percent and the highest since November 2022 (69.4 percent).

Wrote a survey respondent in Transportation & Warehousing: “Tariffs have increased the cost of doing business. … We have tried to budget for the increase, but it has been a moving target. Overall, we are seeing a leveling off in business activity; time will tell if this is temporary or long-lasting.”

The Services PMI® wasn’t the only economic data on Wednesday that gave investors indigestion; the private payrolls report by ADP revealed only 37,000 jobs added in May, a far cry from the 110,000 forecast by analysts. That seemed to conflict with an ISM Employment Index that returned to expansion, with a reading of 50.7 percent.

Among survey respondents’ companies, 14.3 percent reported increased staff levels, down from 14.6 percent the previous month, while 13.2 percent reduced their head counts, a decrease form 16.4 percent in April. Last month, Miller said that the Services Employment Index, over the last 1½ years, has tended to lead such data as the ADP report and the U.S. Bureau of Labor Statistics monthly job report by about three months.

He reiterated on Wednesday, referring to the Employment Index’s contraction in March and April. “We tend to have a one- to two-month lead on what we see in the ADP numbers,” Miller said. “So, I think the ADP numbers were to be expected, and we should expect weakness again in the ADP data next month. If this Employment Index number (for May) is indicative of real strength, we should see a return to strong increases in the ADP numbers in the July time frame.”

In potentially good news for the future, the last three times the Services PMI® contracted were one-offs, as the composite index returned to expansion the following month: December 2022 (49 percent), April 2024 (49.6 percent) and June 2024 (49.2 percent). The last consecutive months in contraction were April and May 2020, as COVID-19 engulfed the globe.

“Businesses are waiting to see how the tariff situation shakes out,” Miller said.

The Report On Business® roundup:

Bloomberg: U.S. Services Activity Contracts for First Time in Nearly a Year. “Combined with data earlier this week showing a third month of shrinking manufacturing activity, the services survey suggests the economy is slowing in the wake of higher U.S. duties and retaliatory tariffs by other countries. Both ISM indexes of exports and imports showed contraction as companies contend with the repercussions of the Trump administration’s fluid trade policy.”

CNBC: ISM Services PMI® falls to 49.9 Percent in May. “You’re watching (Treasury) yields move down again, and the issue is the May reads for ISM Services PMI®, and here they are: 49.9 percent,” analyst Rick Santelli said. “the headline was supposed to come in closer to 52 percent, in expansion territory, but instead it comes in in contraction, under 50 percent. The last time it was under 50 was June of last year.”

MarketWatch: Service Side of the U.S. Economy Contracts for First Time in Almost a Year Due to Trade Fights. “The service sector has driven the U.S. economic expansion over the past few years, but it hasn’t been immune to the trade wars even though most companies are less exposed to imports and exports. New orders sank to a more than three-year low and prices rose as higher U.S. tariffs — and retaliation by other countries — raised the cost of supplies, ISM found.

Reuters: U.S. Service Sector Unexpectedly Contracts in May; Inflation Heats Up. “Suppliers’ delivery performance continued to worsen. This, together with lengthening delivery times at factories, points to strained supply chains that could drive inflation higher through shortages. Businesses are also seeking to pass on tariffs, which are a tax, to consumers.”

The Wall Street Journal: U.S. Services-Sector Activity Unexpectedly Contracts as Tariffs Raise Uncertainty. “(The May PMI® was a) contrast to the small rise to 52.1 expected by economists polled by The Wall Street Journal. … While May’s decline in the index wasn’t indicative of a severe contraction, it revealed uncertainty that is being expressed broadly among survey respondents, said Steve Miller, Chair of ISM’s Services Business Survey Committee.”

In case you missed Monday’s Report On Business® Roundup on the release of the May Manufacturing PMI®, you can read it here. The Hospital PMI® will be released on Friday. For the most up-to-date content on the reports under the ISM® Report On Business® umbrella, use #ISMPMI on X, formerly known as Twitter.

(Photo credit: Getty Images/Welcomia)

 

About the Author

Dan Zeiger

About the Author

Dan Zeiger is Senior Copy Editor/Writer for Inside Supply Management® magazine, covering topics, trends and issues relating to supply chain management.