WASHINGTON, June 3 – The nation’s services sector expanded at a faster pace during May as companies rushed to secure orders and increase stockpiles amid concerns about potential shortages and rising costs stemming from the war with Iran.
On Wednesday, the Institute for Supply Management announced that its nonmanufacturing purchasing managers index climbed to 54.5 in May, up from April’s reading of 53.6. This exceeded economists’ expectations, who had predicted the services PMI would reach 53.8 according to a Reuters survey.
Any measurement exceeding 50 signals expansion in the services sector, which represents over two-thirds of the nation’s economic output. The ongoing three-month U.S.-Israel conflict with Iran has significantly disrupted commodity shipping routes and driven up costs for various goods, including energy, aluminum and fertilizers.
This uptick in services activity aligns with increased manufacturing performance that the ISM reported earlier this week.
New orders for service companies surged to 57.3, compared to April’s 53.5. Meanwhile, services sector inventory levels skyrocketed to 62.5 from the previous month’s 53.1. Companies have been reducing their stockpiles for four consecutive quarters, marking the longest decline since the Great Recession. However, backlog orders and exports both experienced slower growth.
Input costs for businesses continued climbing, with the survey’s price measure reaching 71.3, up from 70.7 the month before. This suggests the oil price surge will continue affecting the services sector. Government data released last week showed inflation accelerated to its fastest rate in three years during April.
Financial markets anticipate the Federal Reserve will maintain its key overnight interest rate between 3.50%-3.75% through next year.
Supplier delivery times remained problematic, though the measure decreased slightly to 55.2 from April’s 56.8. Readings above 50 indicate delayed deliveries. While this elevated figure likely boosted the services PMI as economic demand grows stronger, supply chain disruptions are primarily responsible for the extended delivery periods.
Employment in the services sector stayed weak. The ISM has observed increased “attrition.” However, the ISM’s employment indicator hasn’t proven reliable for predicting private services job growth in the Labor Department’s monthly employment data.
National payroll numbers have shown consecutive months of gains exceeding 100,000 jobs. Economists surveyed by Reuters predict May payrolls likely grew by 85,000 positions following April’s increase of 115,000.
The unemployment rate is expected to remain steady at 4.3%.
