U.S. service sector business activity contracts at slower pace in May, PMI index rises to 37.5

U.S. service providers indicated a further considerable, but softer, shrinking of business activity in May, as the effect of the COVID-19 pandemic continued to dampen client demand. The final IHS Markit U.S. Service Business Activity Index rose to 37.5 in May from April’s record low of 26.7. The figure remains below the threshold 50.0.

The pace of reduction in activity weakened markedly in the midst of some reports of businesses returning to work, but was nonetheless the second-sharpest since data collection started in October 2009. The fall in service sector output was mainly due to emergency public health measures introduced to stem the spread. Stay-at-home measures and social distancing led to challenges for business to reopen, especially those who focus on customer-facing services.

The overall fall in output was also reportedly linked to soft client demand. Several companies stated that new order inflows continued to be sluggish as some clients were yet to reopen after temporary shutdowns. With the exception of April’s recent low, the latest data showed the steepest reduction in new orders since the series started. Some companies implied domestic demand was slowly picking up following a loosening of restrictions, however, new business from abroad also dropped at a historically considerable rate. Alongside ongoing global lockdown conditions, companies implied that travel restrictions had limited foreign demand.

Expectations towards the output outlook over the coming year continued to be negative in May, as uncertainty regarding the length of any recovery and when this would begin reportedly weighed on sentiment. However, the degree of pessimism eased as states loosened lockdown measures. As companies sought to strengthen new orders amid challenging demand conditions, they lowered their selling prices for the third consecutive month in May.

Given the soft demand conditions, service sector companies reduced their staffing numbers at a considerable rate in May. The pace of job shedding was more rapid than any other seen before April, as lower new business inflows led to greater excess capacity. Another monthly fall in total sales also led to a further fall in outstanding business. The decline was steep as companies worked through previously held orders, said IHS Markit in its report.