U.S. ISM Services Index (May 2025)

ISM services index falls into contractionary territory in May

• The ISM Services index fell 1.7 points to 49.9 in May, coming in well below expectations for a modest improvement to 52.0. This marked the first time that the index fell into contractionary territory since June 2024. Ten of eighteen industries reported growth in May, down from eleven in April and fourteen at the start of the year.
• Business activity fell 3.7 points to 50.0, while new orders fell an even sharper 5.9 points to 46.4. The backlog of orders also declined a steep 4.6 points to 43.4. Meanwhile, new exports orders remained relatively unchanged, easing only modestly to 48.5.
• The employment subindex managed to improve, moving back into expansion territory after rising 1.7 points to 50.7. 
• The supplier deliveries index trended higher, increasing by 1.2 points to 52.5. Meanwhile, the prices paid sub-component shot up 3.6 points to 68.7 – the highest level since the end of 2022. Several survey respondents made direct references to tariffs, with one stating “Tariffs remain a challenge, as it is not clear what duties apply. The best plan is still to delay decisions to purchase where possible”.

Key Implications

• Today's ISM report is disappointing, as it indicates that even the services sector is starting to feel the pinch from the uncertain trade environment. The details of this morning's report were not particularly encouraging, with steep drops reported in business activity, new orders, and the backlog of orders. The only bright spot was the improvement in the employment subindex, which indicates that despite the challenging environment, services-based businesses are still hanging on to their workers and likely doing some moderate hiring. 
• The fact that the ISM services index joined its manufacturing counterpart in contractionary territory is a clear sign that the tariff turmoil is rubbing off on the services sector too, with comments from survey respondents that touched on the impact of tariffs also supporting this theme. Additionally, the ongoing increase in the prices paid subindex, indicates that the inflationary pressure from tariffs is sure to make its way on the services sector too. 

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