Following the dramatically better than expected rise in US Manufacturing PMI surveys, analysts expected stability in the Services side of the economy in May.
They were somewhat correct but the message was mixed with one survey improving while the other deteriorated...
S&P Global US Services PMI dropped from 51.0 (April) to 50.9 (flash May) to 50.7 (final May) - dropping back towards March lows.
ISM US Services PMI rose from 53.6 to 54.5 (better than 53.8 exp)
Source: Bloomberg
Under the hood, both surveys signaled rising prices with employment weaker and a mixed picture for orders (ISM higher, S&P lower)...
Source: Bloomberg
"While the US manufacturing economy is reporting a surge in demand as war-related supply and price worries drive precautionary stock building, it’s a different story in the service sector," says Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.
"Demand for services has been largely stalled over the past three months, losing the strength seen earlier in the year."
The sluggish services economy is acting as drag on overall economic growth, which the PMI data signal to be running at a modest annualized pace of just above 1% so far in the second quarter...
Williamson notes that consumer-facing service sectors were the hardest hit, where orders are now falling at the steepest pace since the pandemic in 2020, with respondents blaming the decline on a combination of squeezed spending power from energy prices hikes and customers pushing back on higher prices being charged for services.
However, business services are also seeing reduced order book growth compared to earlier in the year and financial services firms are coming under pressure from higher interest rates.
"Rising costs and cooling demand are meanwhile causing service companies to cut staff at the fastest rate seen since the early months of the pandemic," warns Williamson.
This is not a good sign for CPI...
The increase in input cost inflation being signaled by the PMI points to a further rise in consumer price inflation in the coming months, but, Williamson notes that, on the other hand the "weakening of demand growth and downturn in the labor market being indicated could help allay concerns over any inflation spike becoming more entrenched."
Respondents are almost universally worried about energy costs...
But tariff fears are gone?