- The Institute for Supply Management’s (ISM) non-manufacturing index rose to 56.9 in May (from 55.5), ending its two-month losing streak. The headline print came in above consensus expectations, which called for the index to remain relatively flat at 55.4.
- Three of the index’s four key subcomponents strengthened on the month. Delving into details, the employment subcomponent posted the biggest gain, surging to 58.1 (from 53.7). Business activity improved for the second month in a row, rising to 61.2 (from 59.5), and new orders edged slightly higher to 58.6 (from 58.1).That being said, the backlog orders declined to 52.5 (from 55.0), and supplier deliveries fell by 1.0 points, moving into contractionary territory for the first time since December 2015.
- After pulling back in April, price pressures eased further in May. The prices paid subcomponent edged down 0.3 points to 55.4, and is considerably below its year-ago level.
- Trade-related components showed broad-based deterioration. Export orders fell to 55.5 from 57.0, and import orders declined to 50.0 from 55.0, narrowly avoiding slipping into contractionary territory. It’s important to note that trade components are not seasonally adjusted, and thus the monthly moves should be interpreted with caution. Both export and import orders remain below their year-ago levels.
Key Implications
- May’s headline for the ISM non-manufacturing index delivered a nice surprise, diverging from its manufacturing counterpart and defining expectations of a flat reading. While both indexes trended lower since the second half of last year, the services sector continues to outperform its manufacturing counterpart, with the wedge between the two measures that opened up last September widening in May. This suggests that the services sector is facing fewer challenges than the relatively more trade-exposed manufacturing sector.
- Survey respondents remained upbeat about the economy and domestic demand, even as concerns about labor shortages and tariffs persisted. The desire to continue adding to payrolls is a testament to business optimism.
- Despite the solid performance last month, service-sector performance may deteriorate in the coming months if trade tensions continue to escalate. Recent increase in tariffs on imports from China, and potential tariffs on goods from Mexico will impose real cost on the U.S. consumers, with adverse implications to the bottom lines of service-sector businesses. Agriculture, hospitality, and trade-related industries look to be particularly hard-hit, with the feedback loop to manufactures of items such as agricultural equipment, machinery and autos.
