The U.S. service sector — covering industries such as restaurants, hotels, and transportation — contracted in May for the first time in nearly a year. The Institute for Supply Management’s (ISM) services index fell to 49.9% from 51.6% in April. Readings below 50% signal contraction in the sector.
Business leaders point to heightened uncertainty from ongoing trade disputes as a major factor behind the slowdown. The trade tensions have contributed to frozen hiring plans and elevated input costs as tariffs push up prices for imported goods and intermediate inputs.
Several ISM subindexes highlighted the sector’s weakness. New orders slid to their lowest level in more than three years, indicating softer demand for services. At the same time, prices climbed to a roughly 2½-year high, reflecting higher supply costs passed through to service providers. Although some tariffs have been eased temporarily to facilitate negotiations, the cumulative impact of trade frictions continues to weigh on investment and activity across service industries.
Firms in hospitality and transportation reported weaker bookings and freight demand, while portions of the restaurant and leisure market cited higher food and supply costs. These pressures have made businesses more cautious about staffing and expansion plans, slowing hiring despite generally tight labor markets elsewhere in the economy.
Analysts say the contraction in services may signal a broader cooling in economic momentum if the drivers — chiefly trade uncertainty and cost pressures — persist. A prolonged period of subdued new orders and rising input prices could squeeze profit margins and further temper investment, reinforcing the slowdown. Policymakers and business leaders will be watching upcoming ISM readings and other data closely to see whether this dip is a temporary pullback or the start of a more extended trend.