Lucia Mutikani
5 min read
By Lucia Mutikani
WASHINGTON (Reuters) -The U.S. services sector contracted for the first time in nearly a year in May while businesses paid higher prices for inputs, a reminder that the economy remains in danger of experiencing a period of very slow growth and high inflation.
The survey from the Institute for Supply Management (ISM) on Wednesday showed uncertainty was the dominant theme among businesses as they tried to navigate President Donald Trump's constantly shifting trade policy.
The whiplash from the tariffs that Trump has announced, paused, and imposed has left most businesses in limbo and struggling to plan ahead, to the detriment of the economy. The Trump administration has given U.S. trading partners until Wednesday to make their "best offers" to avoid other punishing import levies from taking effect in early July.
"Until there is clarity on the trading environment, it appears that the business sector will remain wary of putting money to work," said James Knightley, chief international economist at ING.
The ISM said its nonmanufacturing purchasing managers index (PMI) dropped to 49.9 last month, the first decline below the 50 mark and lowest reading since June 2024. It stood at 51.6 in April.
Economists polled by Reuters had forecast the services PMI would rise to 52.0 following some easing in the U.S.-China trade tensions. A PMI reading below 50 indicates contraction in the services sector, which accounts for more than two-thirds of the economy. The ISM associates a PMI reading above 48.6 over time with growth in the overall economy.
"May's PMI level is not indicative of a severe contraction, but rather uncertainty," said Steve Miller, chair of the ISM Services Business Survey Committee. "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."
The ISM on Monday reported that manufacturing contracted for a third straight month in May, with suppliers taking the longest time in nearly three years to deliver inputs amid tariffs.
Retailers, airlines and auto manufacturers are among the businesses that have either withdrawn or refrained from giving financial guidance for 2025. While economists do not expect a recession this year, stagflation is on the radar of many.
Public administration, utilities, educational services, information as well as healthcare and social assistance were among the 10 services industries reporting growth. Eight industries, including retail trade, construction, transportation and warehousing, reported contraction.
