The U.S. service sector barely grew in May as new orders slowed, pushing a measure of prices paid by businesses for inputs to a three-year low, which could aid the Federal Reserve's fight against inflation.
The Institute for Supply Management (ISM) said on Monday that its non-manufacturing PMI fell to 50.3 last month from 51.9 in April. A reading above 50 indicates growth in the services industry, which accounts for more than two-thirds of the economy. Economists polled by Reuters had forecast the non-manufacturing PMI edging up to 52.2.
Though the PMI remains above the 49.9 level, which the ISM says over time indicates growth in the overall economy, last month's slowdown heightened the risks of a recession. The ISM reported last week that its manufacturing PMI was stuck below the 50 threshold in May for the seventh straight month, the longest such stretch since the Great Recession.
The service sector has benefited from consumers shifting spending from goods. But following 500 basis points worth of interest rate increases from the U.S. central bank since March 2022, consumers could be focusing more on basic needs.
A measure of new orders received by services businesses fell to 52.9 last month from 56.1 in April. With demand cooling, services inflation also slowed. This is good news for Fed officials trying to bring inflation down to its 2% target.
The service sector is at the center of the battle against inflation as services prices tend to be stickier and less responsive to rate hikes. A gauge of prices paid by services businesses for inputs dropped to 56.2, the lowest level since May 2020, from 59.6 in April.
Some economists view the ISM services prices paid gauge as a good predictor of personal consumption expenditures (PCE) inflation. The Fed tracks the PCE price indexes for monetary policy. Financial markets see a 70% chance of the Fed keeping its policy rate unchanged at its June 13-14 meeting, according to CME Group's FedWatch Tool.
Service sector employment declined in May. That was, however, at odds with so-called hard data, which have shown persistent strength in the labor market.
The government reported on Friday that nonfarm payrolls increased by 339,000 jobs in May, with private service-providing employment rising 257,000.
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