The U.S. service sector roared back to life in May, painting a brighter picture for economic growth but dimming hopes for a rate cut from the Federal Reserve.
The Institute for Supply Management’s index of the services sector jumped to 53.8 percent from 49.4 percent in April, the highest reading in nine months, according to data released Wednesday. The robust rebound, driven by strong new orders and a surge in export activity, points to economic resilience despite a Fed interest rate policy aimed at restricting activity.
Economists had anticipated a modest rise to 50.7, but the actual figures blew past expectations, marking a significant shift from April’s dip into contraction territory—the first since December 2022. Numbers above 50 percent indicate expansion, suggesting that the sector is firmly back on a growth trajectory.
New orders climbed to 54.1 in May from 52.2 in April, while export orders saw a dramatic increase to 61.8 percent from 47.9 percent. These gains underscore solid demand both domestically and internationally.
“The rebound in services activity is a clear sign that the economy is on solid footing,” said Anthony Nieves, chair of the Institute for Supply Management’s survey committee. “We expect the second half of the year to be slightly better than the first.”
In a separate report, the S&P Global U.S. Services purchasing managers index (PMI) hit a one-year high of 54.8 in May, aligning with earlier estimates and further reinforcing the narrative of a resilient service sector.
“A return to growth of new business following April’s blip supported a marked strengthening of growth in the U.S. service sector in May. Coming on the back of a similar acceleration in the manufacturing sector, the data suggest a healthy pace of expansion in the U.S. private sector approaching the midway point of the year,” Andrew Harker, Economics Director at S&P Global Market Intelligence, noted.
The S&P Global manufacturing index indicates the factory sector expanded in May. By contrast, the ISM index says manufacturing contracted.
Harker warned that it was not all good news in the S&P Global survey. The report indicated that services employment was down for the second month straight. Harker said that businesses were holding off on new hires as they wait to see if the revived demand will stick around.
And inflation remains a persistent problem.
“Despite lower employment, wage pressures remained a key factor pushing up input costs, which increased sharply again in May and prompted a faster increase in selling prices, providing further evidence that inflation remains sticky,” Harker said.
The ISM report indicated that inflationary pressures showed slight moderation, with the prices paid index cooling to 58.1 from 59.2. This indicates that while cost inflation remains a concern, it may be easing somewhat.
As the service sector powers forward, bolstered by consumer spending and robust demand, the broader economic picture remains complex. While challenges persist, the resilience displayed in May’s data provides a hopeful outlook for the months ahead. Additionally, the strength in the services sector could push the Federal Reserve to hold off on raising interest rates this year, maintaining a steady approach in response to the solid economic performance.
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