Growth in the U.S. services sector slowed in May as demand turned sluggish and employment contracted, a survey from the Institute for Supply Management indicated on Monday.
The ISM purchasing managers index tumbled to 50.3 percent in May, down from 51.9 percent in April. Economists had expected the index to tick up to 52, according to Econoday.
A score above 50 percent indicates companies are expanding. The May score, barely above that threshold, indicates that expansion slowed in May. It was nonetheless the fifth month of expansion following a contraction in December. This was the lowest score since May 2020.
The measure of business activity declined half a percentage point to 51.5 percent. The index of new orders, a crucial measure of demand, fell 3.2 percent points to 52.9. This was the fifth consecutive month of expanding orders.
The report, which is looked at as a bellwether for the U.S. economy, suggests the services side of the economy continues to expand and perhaps stabilize.
“Overall business is good, and there has not been a significant change in direction,” an executive in the retail sector told ISM.
“Everything seems to have leveled off: not getting any worse, not getting any better,” an executive from the Professional, Scientific & Technical Services sector said.
“There has been a pullback in the rate of growth for the services sector. This is due mostly to the decrease in employment and continued improvements in delivery times (resulting in a decrease in the Supplier Deliveries Index) and capacity, which are in many ways a product of sluggish demand. The majority of respondents indicate that business conditions are currently stable; however, there are concerns relative to the slowing economy,” said Anthony Nieves of ISM.
The decline in employment registered in the ISM survey contrasts with the strong employment figures seen in the Labor Department’s report on nonfarm payrolls on Friday. The economy added 339,000 workers to payrolls in May, the Labor Department said. The unemployment rate, however, moved up to 3.7 percent from 3.4 percent.
Low unemployment and a robust appetite for workers on behalf of U.S. businesses appears to be supporting a high level of consumer spending. Personal consumption expenditures were up 0.8 percent in April compared to the previous month, according to the latest data available, the biggest jump since an unanticipated 1.9 percent surge in January.
Many economists expect that employment and consumer spending will decline as the Federal Reserve’s interest rate hikes slow growth. Surveys suggest economists think there is a 65 percent chance of a recession in the next 12 months, relatively high odds. Other indicators—such as consumer sentiment, the contraction of the money supply, the inverted yield curve, and the Leading Economic Indicator index—also point to a recession approaching.
Still, the economy has continued to surprise to the upside. The nonfarm payrolls number, for example, has come in above consensus expectations for 14 straight months.
A separate report from S&P Global released Monday, based on its own survey of purchasing managers, came to the opposite view, finding that business activity grew at a sharper pace in May.