US: Activity in Non-Manufacturing Sector Continues to Contract, but Shows Nascent Signs of Improvement

Jun 03 20, 15:07 GMT

The Institute for Supply Management’s (ISM) Non-Manufacturing Index improved to 45.4 in May, a 3.6 point increase from April. The headline number came in higher than the consensus forecast, which called for a 44.4 print.
Three out of the four main subcomponents saw increases last month. The business activity subcomponent led the way, rising to 41.0 from 26.0. This was followed by new orders, moving higher to 41.9 from 32.9, and employment, which increased slightly to 31.8 from 30.0.
Meanwhile, the supplier deliveries subcomponent registered its first decline since February, falling to 67.0 from 78.3. This points to an acceleration in delivery times. Slower deliveries, translating to a significant increase in this specific subcomponent, had distorted the overall index over the past two months.
Trade indicators were mixed on the month. While import orders fell (-5.6 points to 43.7), reflecting weakness in domestic demand, export orders advanced by 5.2 points to 41.5.
The number of industries reporting growth on the month increased from 2 to 4 out of a total of 18 industries counted in the report.

Key Implications

While still in contractionary territory, activity in the services sector is starting to show nascent signs of a recovery from the nadir seen in April. The pace of contraction eased as most states began a phased reopening of their economies in May, allowing non-essential businesses in the services sector to resume their activities under capacity limits. Also encouraging was the drop in the supplier deliveries sub-index, which points to a reduction in supply-chain disruptions caused by the pandemic.
Sentiment should continue to improve as economic activity picks up gradually in the months ahead. However, while the worst of the pandemic is likely behind us, the path to full recovery will neither be easy, nor quick. Mending the tremendous blow to labor markets across the country is going to take time. Meanwhile, an uncertainty-filled outlook will likely keep a lid on business investment and consumer spending for some time as well.