US services sector activity increased in May, with the ISM services PMI rising to 54.5, exceeding forecasts. Businesses rebuilt inventories due to anticipated shortages and higher prices linked to the war with Iran. However, price pressures rose, leading some companies to implement hiring freezes.
U.S. services sector activity picked up in May, with the Institute for Supply Management's nonmanufacturing purchasing managers index increasing to 54.5 from 53.6 in April, exceeding economists' forecasts of 53.8. This growth was driven by businesses placing preemptive orders and rebuilding inventories in anticipation of shortages and higher prices, influenced by the war with Iran which has disrupted commodity shipping and raised prices for energy, aluminum, and fertilizers. The new orders index rose to 57.3 from 53.5, and the inventories index jumped to 62.5 from 53.1, marking the longest stretch of inventory drawdown since the Great Recession. However, growth in backlog orders and exports slowed. The prices paid index for inputs increased to 71.3 from 70.7, indicating continued price pressures spilling over into the services sector. Services sector employment remained subdued, with an uptick in attrition noted by ISM. Many companies have adopted temporary hiring freezes to offset their own rising costs.
The resilience of the services sector despite rising inflation and geopolitical disruptions, coupled with continued price pressures, presents a complex picture for the Federal Reserve as it considers future interest rate decisions.