Services Sector Activity Strongly Expands In May: 'Notable Higher Business Activity, Faster New Orders Growth'

The sentiment in the U.S. service sector sharply expanded in May, far more than expected and reversing the decline that began in April.

What Happened: After 15 straight months of expansion, business morale gauging the services sector activity temporarily entered into contraction in April, but returned to a strong growth pace May, according to Wednesday data from the Institute for Supply Management (ISM).

May ISM Services PMI Report: Key Highlights

• The overall ISM Services PMI rose to 53.8%, marking a 4.4-percentage-points surge from April's 51.4% and beating the expected 50.8%, according to Econoday.
• The subindex for Business Activity rose to 61.2% in May, marking a significant increase of 10.3 percentage points from April’s 50.9%.
• The subindex for New Orders continued to expand for the 17th consecutive month, rising from 52.2% in April to 54.1% in May.
• The subindex for Prices Paid eased from 59.2% to 58.1%, indicating a slightly improvement in price pressure dynamics felt by services providers.
• The subindex for Employment contracted for the fifth time in six months, but at a slower pace compared to April.

Anthony Nieves, chair of the Institute for Supply Management Services Committee, said: “The increase in the composite index in May is a result of notably higher business activity, faster new orders growth, slower supplier deliveries and despite the continued contraction in employment.”

Survey respondents reported that overall business is on the rise, though growth rates differ by company and industry. Employment challenges persist, mainly due to difficulties in filling positions and managing labor costs. Most respondents believe that inflation and interest rates hinder better business conditions.

Market Reactions: Stocks Hold Gains, Bond Yields Rise Again

U.S. stocks managed to broadly hold session gains in reaction to the higher-than-expected ISM Services PMI report, despite bond yields resuming their rise.

• The S&P 500 Index, as tracked by the SPDR S&P 500 ETF Trust SPY, was 0.2% higher at 10:15 a.m. in New York.
• The tech-heavy Invesco QQQ Trust QQQ outperformed, up by 0.8%.
• The blue-chip SPDR Dow Jones Industrial Average ETF DIA was down by 0.2%.
• Long-dated Treasury yields saw an uptick of about 2 basis points, pushing the iShares 20+ Year Treasury Bond ETF TLT down by 0.3%.
• The U.S. dollar rallied, with the Invesco DB USD Index Bullish Fund UUP, up 0.5%.
• Gold, as tracked by the SPDR Gold Trust GLD, was 0.4%, but trimmed gains as the greenback gained traction.

Read now: 152,000 New Jobs Added In May, Missing Expectations: ‘Notable Pockets Of Weakness’

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