The ISM services index in May was just above the 50 threshold that indicates expansion, according to the Institute for Supply Management. The index was at 50.3% in May, down from 51.9% in April. May was the lowest reading for the index since it slipped into contraction for one month in December 2022. The index has fallen in three of the past four months.

Two of the four subindices used to compute the overall index were above 50% in May, with new orders at 52.9% and business activity/production at 51.5%. However, both measures were down from April, from 56.1% and 52.0%, respectively. The employment subindex moved to contraction from expansion in May, to 49.2% from 50.8%, while the supplier deliveries index fell to 47.7% from 48.6%.

Conditions among the subindices not used to compute the overall index were mixed. They generally indicate that previous backlogs are easing, that inventories are too high, and that price pressures are fading. Export orders rose over the month, but imports were flat. 

Eleven of the 18 services industries covered reported expansion in May, with the strongest growth in accommodation and food services and management of companies and support services. Seven industries reported contraction, with the steepest declines in mining and agriculture, forestry, fishing, and hunting.

Although the services sector is still expanding, growth is slowing and is just barely positive. The best news in the ISM services index for May was continued growth in the forward-looking new orders subindex, although the pace of expansion slowed. The ISM manufacturing index was in contraction at 46.9% in May, down from 46.9% in April; it has been in contraction since November 2022.

Taken together, the services and manufacturing ISM indices point to slowing and weak, but still positive, growth in mid-2023. The ongoing declines in the two indices are likely to persist, with the U.S. economy set to enter recession around the end of 2023 as the cumulative impact of higher interest rates continues to weigh on activity.

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