June 3 2025

The Institute for Supply Management not only publishes an index of manufacturing activity each month, they publish two days later a survey of service sector firms.  The business activity index declined 3.7 points in May to 50.0 after having fallen 2.2 points in April.  We tend to focus on the business activity component as a measure of “production” because it seems to track better with the pace of economic activity.  Trump’s imposition of tariffs, the early stages of federal government layoffs, and deportation of immigrants are certainly making people in the service sector nervous..

The composite index fell 1.7 points in May to 49.9 after rising 0.8 point in April.  Eleven industries reported growth in April, a drop of three from 14 industries reported in January and February.  According to Steve Miller, Chair of the Institute for Supply Management’s Business Survey Committee, “Ten industries reported growth in May, down one from the 11 industries reported in April. The Services PMI^® has contracted in only four of the last 60 months dating back to June 2020. The May reading of 49.9 percent is 2.4 percentage points below the 12-month average reading of 52.3 percent.””  He added that, “May’s PMI^® level is not indicative of a severe contraction, but rather uncertainty that is being expressed broadly among ISM Services Business Survey panelists. The average reading of 50.8 percent over the last three months still indicates expansion in that time period, but it is a notable shift of 2 percentage points below its average of 52.8 percent over the previous nine months. The New Orders Index moved into contraction territory for the first time in nearly a year. Tariff impacts are likely elevating prices paid by services sector companies, with the Prices Index hitting its highest level since November 2022, when the Bureau of Labor Statistics’ CPI indicated that prices had increased 7.1 percent as compared to November 2021. 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.”

At its current level the ISM group says that is consistent with 0.4% growth in GDP.  Following a 0.2% decline in the first quarter we expect to see 5.0% GDP growth in the second quarter and 2.5% GDP growth in 2025.

Comments from respondents include:

• WHAT RESPONDENTS ARE SAYING

  • “Tariff variability has thrown residential construction supply chains into chaos. Many items are still manufactured in southeast Asia, and suppliers are beginning to test the waters for increases. Major heating, ventilation and air conditioning equipment manufacturers are passing on their cost increases due to higher refrigerant and steel commodity prices. Planning is difficult for community projects that could be scheduled for the next 22 to 30 months.” [Construction]
  • “Steady, with some signs of growth and opportunity.” [Finance & Insurance]
  • “Federal budget cuts are affecting purchasing decisions.” [Health Care & Social Assistance]
  • “Tariffs remain a challenge, as it is not clear what duties apply. The best plan is still to delay decisions to purchase where possible.” [Information]
  • “Due to the tariffs, we’ve had had small price increases on our international raw materials, and some suppliers are holding back inventory to cover uncertainties. We’ve seen some slowdown in the production of new wells, but there has been an increase in restimulation of existing wells.” [Mining]
  • “Life science startups continue to push forward on clinical trials and market launches. The level of investment grew this month. The impacts of tariffs are being watched but are not driving changes in strategic plans.” [Professional, Scientific & Technical Services]
  • “The projects are slowly starting to be issued, albeit with a great deal of market uncertainty.” [Public Administration]
  • “Business is strong. Consumer concerns over tariffs may be driving some demand.” [Retail Trade]
  • “Tariffs have increased the cost of doing business. It’s too early to tell what the lasting impact of this will be. We have tried to budget for the increase, but it has been a moving target. Overall, we are seeing a leveling off in business activity; time will tell if this is temporary or long lasting.” [Transportation & Warehousing]
  • “Business activity is increasing due to demand for data centers, commercial growth and infrastructure. Residential growth remains flat.” [Utilities]

The orders component declined 5.9 points in May to 46.4 after having risen 1.9 points in April.  This index had been steadily declining since September of last year. Comments from respondents include: “Normal seasonal business, but overall volumes for the year are down” and “While inquiries have been coming, no action has been taken to close deals.”

The ISM non-manufacturing index for employment rose 1.7 points in May to 50.7 after having climbed 2.8 points in April.  The employment category has been bouncing around in recent months.  It declined for two months and then shifted back into expansion mode in May.   Seven industries reported an increase in employment in May. Comments from respondents include: “Higher scrutiny is being placed on all jobs that need to be filled, whether it be a new position or backfill for an existing role” and “Taking advantage of large company layoffs to hire or promote highly experienced staff to fill knowledge gaps.”

The suppler deliveries component climbed 1.2 points in May to 52.5 after having risen 0.7 point in April.  This component is reversed in the sense that a reading above 50 percent indicates slower deliveries to service sector firms, while a reading below 50 percent indicates faster deliveries. Thus, firms reported slower delivery times in  for the sixth month in a row.  Comments from respondents include: “Longer lead times for equipment” and “Suppliers are saying faster deliveries are being enabled by order cancellations.”

Finally, the price component rose 3.6 points in May to 68.7 after climbing 4.2 points in April.  The May reading is the highest since November 2022 and is the 6th consecutive month with a reading above 60.0.   Sixteen of 18 service sector industries reported an increase in prices paid during the month.

The manufacturing sector of the economy contracted every month from November 2022 until January 2025. After rising in January and February the index has since resumed its decline.  The service sector has been steadily softening since the beginning of the year.  Following a 0.2% decline in GDP in the first quarter we anticipate 5.0% GDP growth in the second quarter and 2.5% GDP growth in 2025.

.Stephen Slifer

NumberNomics

Charleston, SC