Source: Economics Group of Wells Fargo Bank, N.A.
Summary
The ISM services index leaped by the most in 16 months, revealing the April contraction was a blip and activity remains steady. While new orders suggest continued demand, the selected industry comments and continued employment contraction reveal a touch of caution among service-providers.Steady Service Sector
The ISM Services Index surprised to the upside in May, jumping by the most in 16 months to a reading of 53.8 (chart). The large gain almost entirely reflects a rebound in the business activity component and makes the prior-months’ contractionary reading of the overall ISM look like a blip.
Business activity, a measure of current conditions, leaped 10.3 points in May, hitting its highest reading in almost two-and-a-half years (chart). After accounting for over 80% of the decline in the overall ISM in April, business activity was responsible for more than half of the gain in the overall ISM index. While the outturn suggests service-sector activity is still booming, we take this outturn with a grain of salt given it came after an unusually low reading in April. But most data still point to a services sector that continues to expand, and that’s keeping pressure on prices.
The prices paid component continues to be front and center in this release as services-inflation remains a top concern for Fed officials. Prices paid slipped 1.1 points, but at 58.1, is still consistent with an expansion in prices.