US service sector activity slows in May; but likely to improve in coming months

May’s ISM non-manufacturing report implies certain slow down in service sector growth in mid-second quarter of 2016. The ISM non-manufacturing index fell in May by 2.8 points to 52.9, following a rise for two straight months. Consensus had projected a smaller fall to 55.3. At 52.9, the US ISM non-manufacturing index is at its lowest level since February 2014.

All the subcomponents of the index, except for two, declined in May. The employment index declined 3.3 points to 49.7, whereas the new orders subcomponents fell 5.7 points to 54.2. Both the subcomponents had improved in the previous two months.

Furthermore, the business activity index and export orders index dropped to 55.1 and 49 respectively. The backlog of orders dropped by 1.5 to 50, whereas imports fell 0.5 points to 53.5 in May. Meanwhile, inflationary pressures kept on building in May. This resulted in the prices paid subcomponent to further rise to 55.6 after being in contractionary territory in March.

The ISM non-manufacturing data was another negative report for the US as two of the subcomponents entered the contraction territory. The drop of the employment subcomponent is expected to be for a brief period of time and mainly due to the Verizon strike. But the new export orders components’ fall emphasizes that demand for service exports is expected to remain weak due to subdued external demand, noted TD Economics in a research report.

Even if the headline ISM non-manufacturing index continues to be in expansionary territory, the slowdown seen gives the FOMC additional reason to keep interest rate on hold in June. Nevertheless, there are wider signs of positivity in the domestic economy of the US. Consumer spending continues to be strong in Q2, while, housing market is rebounding. This is expected to indicate a recovery in the non-manufacturing sector in the coming months.