U.S. Service Industry, Contracted In May For The First Time In A Year…“Tariffs And Price Burden Increased”

Service Purchasing Managers' Index Below Expectations (Source: WSJ)

The American services sector has returned to a contraction trend after one year. As demand decreases, tariff burdens, and rising prices are compounded, there is an interpretation that they signify the start of a full-scale slowdown in the American economy.

On the 4th (local time), the Institute for Supply Management (ISM) announced that the service purchasing managers' index (PMI) for May recorded 49.9. It fell by 1.7 points compared to the previous month, falling below the baseline of 50, entering a contraction phase. This is a figure that falls below all market expectations compiled by Bloomberg.

Especially, the new orders index fell sharply by 5.9 points to 46.4 compared to the previous month, showing the largest decline since June 2024. ISM assessed that this figure is not a short-term fluctuation but rather caused by “uncertainty due to tariff increases inducing an overall contraction.” Companies that responded to the survey also reported that “new orders are being postponed due to rising import costs and unpredictable policy environments.”

By industry, eight sectors, including retail, construction, and logistics showed contraction, while ten sectors, including accommodation and food services, maintained expansion. The employment index rose to 50.7, indicating that employment is still maintained, but the inventory sentiment index soared to 62.9, suggesting that companies are increasing inventories due to concerns about a slowdown in demand.

Price pressures have also increased significantly. The prices paid index is at 68.7, the highest since November 2022. Experts point out that this figure reflects the full-fledged impact of recent import tariff increases in the United States and retaliatory tariffs in response.

Steve Miller, chairman of ISM, said, “This figure indicates a contraction due to broad uncertainty rather than a severe recession,” analyzing that warning lights are on for a slowdown across the American economy as the manufacturing index has already been in contraction for three consecutive months, compounded by the sluggishness in the service sector.