US ISM Services Sector Activity Picks Up in May but Faces Mideast Conflict Impact of Higher Costs of Fuels, Other Oil Products; Employment Remains Weak

–ISM’s Miller: Fed Likely to Hold Interest Rates Steady in Near Term as Inflation Mainly Due to Fuel Prices, Exerting Some Downward Pressure on Growth

By Max Sato

(MaceNews) – U.S. services sector activity accelerated in May after slowing in the previous two months thanks to higher new orders, but the sector continues to face rising costs for fuels and transportation amid the lingering Middle East conflict; employment contracted for a third straight month, industry data released Wednesday showed.

The purchasing managers index for services compiled by the Institute for Supply Management, which indicates direction of activity, rose a modest 0.9 percentage point to 54.5, above the consensus forecast of 53.7. It followed a 0.4-point dip to 53.6 in April, a 2.1-point drop to 54.0 in March and a 2.3-point gain to a more than three-year high of 56.1 in February. The index is 1.7 points above its 12-month moving average of 52.8 in May and stayed above the average for the eighth straight month.

“May’s services PMI is the fifth month in a row with an increase in the 12-month PMI average, up 1.1 percentage points from 51.7 in December 2025 to its current 52.8,” ISM Services Business Survey Committee Chair Steve Miller said.

The services sector is now in expansion for 23 months in a row, weathering the drag from the protectionist U.S. policy, while manufacturing activity expanded for the fifth straight month in May, emerging from the tariff-triggered doldrums of 2025.

Of the four subindexes that make up the composite PMI, employment is the only one that is in contraction (below 50 for three months in a row) and also the only one that remains below its 12-month moving average. The index stood at 47.9 in May, down slightly from 48.0 in April, when it rose 2.8 points after plunging 6.6 points to a more than two-year low of 45.2 in March from a 12-month high of 51.8 in February.

“When looked at the combination of a slightly faster contraction in the employment index, it looks like productivity continues to enable companies to more effectively keep up with high new orders of business activity without adding people.” Miller told reporters. “Respondents commented frequently that companies instituted hiring freezes or not backfilling vacated positions and most respondents reported they were holding flat in employment month over month.”

Reluctance to hire also comes from what appears to be a short-term boost to new orders, which many firms attributed to “seasonality,” he added.

Elsewhere, the prices index remains elevated above 70, rising 0.6 point to a nearly four-year high of 71.3 (the highest since 72.6 in August 2022). “For the third month in a row, no commodities in the report listed as down in price, with multimonth runs of being up in price for aluminum, copper, diesel, gasoline, software licensing and transportation,” Miller said in the report.

“We are seeing the dual effects of the administration’s tariff policy dynamics and the conflict in the Persian Gulf affect our pricing,” a firm in the accommodation and food services industry told the ISM. “Suppliers across numerous industries are trying to pass price increases for fuel surcharges and increased input costs for resin-based products and the like.”

An education services provider also said, “Starting to see increased supply constraints and associated price increases, especially for construction materials and computers like laptops and tablets.”

Asked about the impact of the combination of weak employment and rising inflation on the Federal Reserve’s policymaking amid market expectations that some central banks will have raise interest rates, Miller replied, “I was encouraged that we didn’t see a bigger jump in prices. However, the direct answer to your question is that I can’t see any room to increase interest rates in the near term. I would presume we will see a wait and see based on the initial attitude of the new Fed chair.”

“With higher costs of petroleum already creating some downward pressure in economic activity, I would presume that they wouldn’t go ahead and increase interest rates given that probably the majority of this price increase is directly related to petroleum costs,” he said.

Only a slight rise in the inventory sentiment index indicates that “the significant increase in inventories was in line with plans, not disruption in demand/supply planning,” Miller said. The latest inventory buildup seems to be arising from both a physical increase in stored goods and rising costs, he said.

Miller said he had expected to see much slower supply deliveries in the face of shortages of jet fuel and other refined petroleum products caused by the Iran war but that the May report indicates the impact on transportation has been limited to prices so far and not creating availability problems. The supply deliveries subindex fell 1.6 points in May to 55.2 but it is still 2.1 points above its 12-month average.

Three of the four sub-indexes that directly factor into the services PMI were in expansion territory (prior figures in parentheses).

Business activity 57.7 (55.9) +1.8, the highest since 57.7 in October 2024.

New orders 57.3 (53.5) +3.8; The index rose 2.0 points to 60.6 in March to hit the highest since 61.6 in February 2023.

Employment 47.9 (48.0) -0.1; The index slumped 6.6 points to 45.2 in March, falling to the lowest since 43.7 in December 2023, only a month after it rose 1.5 points to 51.8 to reach the highest since 53.9 in February 2025; the last contraction was seen in a six-month period to November 2025.

Supplier deliveries 55.2 (56.8) -1.6; In April, the index hit the slowest since 57.8 in July 2022 (above 50 means slower deliveries).

Among other sub-indexes:

Prices 71.3 (70.7) +0.6, the highest since 72.6 in August 2022; above 70 for the third straight month, above 60 for 18 months in a row. The index fell 3.6 points to 63.0 in February, the lowest since March 2025 (60.9); above 60 for 16 months in a row

Inventories 62.5 (53.1) +9.4; matched the record high of 62.5 hit in May 2010.

Inventory sentiment 55.2 (55.1) +0.1; 0.2 point above its 12-month average. Despite the jump in the inventories index, the slight 0.1-point rise in the inventory sentiment index “indicates respondent confidence that business activity will remain strong amid higher costs, so expanding inventories are not of concern,” Miller said in the report.