May Services PMI falls but remains in growth mode, says ISM

Services economy activity, for the month of May, was off from April but still showed growth, according to the most recent edition of the Services ISM Report on Business, which was issued today by the Institute for Supply Management (ISM).

The reading for the report’s key metric—the Services PMI (formerly the Non-Manufacturing PMI)—came in at 55.9 (a reading of 50 or higher signals growth) was down 1.2% from April, matching the March to April decrease. The Services PMI showed growth, at a slower rate, for the 24th consecutive month, with services sector growth now remaining intact for 146 of the last 148 months through May, said ISM.

The May Services PMI is 5.3% below the 12-month average of 61.2, with November 2021’s 68.4 and May’s 55.9 representing the high and low readings over that period, respectively. What’s more, the May reading represents the lowest one since February 2021, which also came in at 55.9.

ISM reported that 14 of the services sectors it tracks saw gains in May, including: Mining; Construction; Real Estate, Rental & Leasing; Educational Services; Transportation & Warehousing; Management of Companies & Support Services; Utilities; Accommodation & Food Services; Wholesale Trade; Professional, Scientific & Technical Services; Arts, Entertainment & Recreation; Other Services; Health Care & Social Assistance; and Public Administration. The three industries with decreases were: Agriculture, Forestry, Fishing & Hunting; Retail Trade; and Information.

The report’s equally weighted subindexes that directly factor into the NMI were mixed in April, including:
-Business activity/production, at 54.5, decreased 4.6%, growing, at a slower rate, for the 24th consecutive month, with 13 services sectors reporting growth;
-New orders, at 57.6, increased 3.0%, growing, at a faster rate, for the 24th consecutive month, with 15 services sectors reporting growth;
-Employment, at 50.2, increased 0.7%, growing after contracting in April a 5.5% March gain, which was preceded by seven straight months of growth, with nine services sectors seeing employment increases; and
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Supplier deliveries—at 61.3 (a reading above 50 percent indicates slower deliveries)—were down 3.8% compared to April, slowing, at a slower rate, for the 36th consecutive month
Comments from ISM member panelists included in the report highlighted various issues being seen in the services sector, including: supply chain, employment, and long lead times, among others.

“The paper industry is still being hampered by employment issues, freight costs and scarcity of truckers, as well as the war in Ukraine,” said an Information services respondent. “European paper sent to North America is being slashed due to the war and the lack of fiber, along with high energy costs. Mills in North America are still struggling to keep up with demand.”

Tony Nieves, Chair of ISM’s Management Services Business Survey Committee, said in an interview that while both April and May saw sequential declines, while still growing, that it is impossible to maintain some of the recent growth that has been intact over the last year-and-a-half.

“What we saw [in the report] was similar to what we saw in the March report,” said Nieves. “What happened was that because of the pent-up demand we had and the lack of expedited deliveries and just the whole logistical constraints we experienced, what people were doing was doubling-up on orders. They were over-ordering and trying to mitigate some of the shortages they were having by frequencies or quantities of orders. I think that as stuff started arriving that is when we saw demand go down after the fact, even with inventories being depleted. As these orders were coming in, there was a bit of a wane there, with things now catching up.”

Addressing the nearly 4% decline for supplier deliveries, Nieves said that is related to some easing at U.S. ports, with delays still intact, and not close to pre-pandemic levels. He also cited ongoing issues with trucking and slow rail service, as well as labor remaining an issue.

As for the 7.4% decline for backlog of orders, he explained a similar decline is not likely in June.

“Backlogs grew from month to month, it is just at a slower rate,” he said. “I am curious to see what happens over the course of the summer, as people go on vacation and businesses close, especially on the manufacturing side. What has transpired in the last two years is just mitigating circumstances. We don’t know if things will stay open, because we have not reached full capacity yet.”

With China slowly reopening and getting back online, Nieves said this speaks to how supply management professionals have always looked at alternate supply routes when they cannot get product from China and other origin countries, in order to mitigate disruption to the supply chain, and turn elsewhere.

“When these ports start seeing more stuff come in, it is not going to be a bottleneck like we had at the peak, where there more than 120 vessels off shore between the Port of Long Beach and the Port of Los Angeles. I don’t think we will have a queue like that again. It might increase but certainly not at that level. Also, keep in mind there was all of that pent-up demand, and demand has waned a little bit. It has not caught up to capacity, but it has waned and consumer sentiment is also down a little bit. And we also had stimulus money infused into the economy, and it usually takes about two years for that to run its course. We are starting to get close to that timeline here.”

In the coming months, Nieves said it is reasonable to expect the Services PMI to be in the mid-to-upper 50s range, rather than previous levels in the mid-60s, like in the past.