The U.S. services sector contracted in May for the first time in nearly a year, according to the Institute for Supply Management. The ISM services index fell to 49.9% from April’s 51.6%, sliding below the 50% mark that separates expansion from contraction. While services firms generally have less direct exposure to international trade than manufacturers, ongoing trade disputes have nonetheless disrupted activity across many service industries.
Several components of the report were notable. New orders dropped sharply to 46.4%, their weakest reading in more than three years, signaling a pullback in demand. At the same time, price measures moved higher: input and selling prices rose, pushing the prices index to 68.7%, its highest level in roughly two and a half years, indicating renewed inflationary pressure within the sector. Production barely registered growth at 50.0%, and employment remained soft at 50.7%, suggesting modest hiring and limited capacity gains.
Business leaders cited uncertainty and rising costs as constraints. For example, a transportation executive highlighted higher operating expenses driven by tariffs. Although some tariff relief announced by the administration provided temporary ease for certain businesses, analysts say that persistent trade tensions are likely to keep a drag on services-sector growth until trade disputes are settled.
Overall, the ISM report points to cooling momentum in the services economy: demand has softened, cost pressures are increasing, and activity levels are close to flat. Market watchers and policymakers will likely monitor upcoming data for signs of whether the sector slips further into contraction or stabilizes as tariff pressures and broader economic conditions evolve.