ISM services PMI rises to 54.5 in May, beating expectations

U.S. services activity expanded at the fastest pace in over a year in May, a sign the economy is gaining momentum even as inflation pressures persist.

The Institute for Supply Management's services purchasing managers' index rose to 54.5 in May from 53.6 in April, topping the 53.7 consensus estimate and marking the strongest reading since February 2025. A reading above 50 indicates expansion.

"The services sector continues to drive U.S. economic momentum, with broad-based expansion across most subindexes," said Susan Spence, chair of the ISM Services Business Survey Committee.

The reading extends a streak of services expansion that has run for more than two years. The new orders and business activity subindexes both strengthened in May, ISM said, while the prices paid index remained elevated — a sign that input cost inflation in the service sector is proving persistent. The employment subindex improved but stayed in contraction territory for a third straight month, reflecting ongoing caution in hiring across service industries.

The data complicates the outlook for Federal Reserve rate policy. With the manufacturing PMI also expanding at 54 in May — its fifth straight month of growth — the economy is showing broad-based resilience that gives newly confirmed Fed Chair Kevin Warsh little reason to cut rates. Overnight index swaps now price less than a 30 percent probability of a rate reduction by year-end, down from 45 percent a month ago, according to CME FedWatch data.

The divergence between services and manufacturing has narrowed sharply. In April, the services sector held a roughly 1-point lead over manufacturing; in May, the gap narrowed to just 0.5 points as both sectors expanded. All six of the largest service industries reported growth, ISM said.

The elevated prices paid reading matters for the Fed because services inflation — driven by labor costs and rents — has proven more persistent than goods inflation throughout the current cycle. Core PCE, the Fed's preferred inflation gauge, rose 3.3 percent year-over-year in April, its highest in more than two years, according to Bureau of Economic Analysis data.

"The combination of above-trend services growth and elevated input prices keeps the Fed in a holding pattern," said James Okafor, macro analyst at Edgen. "The data supports the view that the next move is a cut, but not until 2027 at the earliest."

The ISM services report follows a string of stronger-than-expected economic data, including April's nonfarm payrolls print of 232,000 and a 1.6 percent annualized GDP growth reading for the first quarter. The next major test for the economy comes Friday with the May jobs report, where economists expect 93,000 new positions.

This article is for informational purposes only and does not constitute investment advice.