Services-Sector Expansion Continued in May

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The Institute for Supply Management’s composite services index increased to 64.0 in May, rising 1.3 points from 62.7 in the prior month. The index remains solidly above neutral and suggests the 12th consecutive month of expansion for the services sector and the broader economy (see top chart).

Among the key components of the services index, the business-activity index (comparable to the production index in the ISM manufacturing report) increased 66.2 in May, up from 62.7 in April, a very strong result (see top chart). This measure has been above 50 for 12 consecutive months and above 60 for the last three months. For May, all 18 industries in the services survey reported expansion.

The services new-orders index increased to 63.9 from 63.2 in April, a gain of 0.7 points from April (see bottom chart). All 18 industries reported expansion in new orders in May. The new-export-orders index, a separate index that measures only orders for export, rose to 60.0 in May versus 58.6 in April. Eight industries reported growth in export orders against ten reporting no change and none reporting declines.

Backlogs of orders in the services sector likely grew as the index increased to 61.1 percent from 55.7 percent. Backlogs of orders have grown for 11 of the past 12 months. Twelve industries reported higher backlogs in May while four reported a decrease.

The services employment index came in at 55.3 in May, down from 58.8 in April (see bottom chart). Ten industries reported growth in employment while three reported a reduction. The report notes that survey respondents are reporting difficulty finding qualified candidates and that competition for labor continues to intensify.

The Bureau of Labor Statistics’ Employment Situation report for May is due out on Friday, June 4th. Consensus expectations are for a gain of 650,000 private, nonfarm-payroll jobs. The unemployment rate is expected to drop to 5.9 percent. The ADP estimate for private, nonfarm payrolls released today estimates a gain of 978,000 private-sector jobs for May.

Supplier deliveries, a measure of delivery times for suppliers to nonmanufacturers, came in at 70.4, up from 66.1 in the prior month. It suggests suppliers are falling further behind in delivering supplies to services businesses, and the slippage has accelerated from the prior month. The slower deliveries are a result of labor constraints, production difficulties, and transportation problems. Seventeen industries reported slower deliveries in May.

The latest report from the Institute of Supply Management suggests that the services sector and the broader economy expanded again in May. Several respondents to the survey mentioned improving levels of activity but also increased price pressures and materials shortages, particularly related to supply chain, logistics, and transportation issues as well as labor difficulties. Overall, the outlook remains tilted to the upside.

* This article was originally published here

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