Services Activity Slips Into Stagnation In May As Cost Pressures Surge To November 2022 Highs

Activity in the U.S. services sector—long the backbone of the economy—unexpectedly showed no signs of growth in May, while cost pressures surged to their highest level in over three years, intensifying fears that tariffs and trade frictions are stoking a stagflationary environment.

The Institute for Supply Management's Services Purchasing Managers Index fell to 49.9% in May, down from 51.6% in April, missing consensus expectations of 52%. The reading marked the first marginal contraction in services activity since June 2024. The ISM Services PMI has contracted in only four of the last 60 months dating back to June 2020.

New orders plunged to 46.4%, a 5.9 percentage point drop on the month, while business activity stagnated at 50%, down sharply from April's 53.7%.

Employment improved slightly to 50.7%, after two months in contraction territory. The Backlog of Orders Index sank to 43.4%, its lowest since August 2023, while inventories contracted again, with the index falling to 49.7%.

“May's PMI level is not indicative of a severe contraction, but rather uncertainty that is being expressed broadly among ISM Services Business Survey panelists,” said Steve Miller, chair of the Institute for Supply Management.

“Respondents continued to report difficulty in forecasting and planning due to longer-term tariff uncertainty and frequently cited efforts to delay or minimize ordering until impacts become clearer," he said.

Heavy Price Pressures Hit Services Activity

The standout figure was the Price Index, which jumped to 68.7%, up 3.6 percentage points from April and the highest level since November 2022. Prices have surged 7.8 points in just two months, an acceleration not seen since late 2022.

“Tariff impacts are likely elevating prices paid by services sector companies, with the Prices Index hitting its highest level since November 2022, when the Bureau of Labor Statistics' CPI indicated that prices had increased 7.1 percent as compared to November 2021,” Miller added.

Market Reactions: Treasury Yields Hit 1-Month Low

Wall Street pared early morning gains after the data, with the S&P 500 – as tracked by the SPDR S&P 500 ETF Trust SPY – trading flat for the day.

The U.S. dollar lost further ground, extending losses suffered earlier in the day after a weaker-than-expected employment growth in May.

The Invesco DB USD Index Bullish Fund ETF UUP – which tracks the U.S. dollar index (DXY) – fell 0.5% for the session.

Investors flocked to Treasuries amid rising growth concerns. Yields on 10-year Treasury bonds tumbled to 4.37%, hitting the lowest levels since May 9. The yield on the 30-year Treasury bond fell 8 basis points to 4.90%.

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