May ISM Services PMI sets new record

The Institute for Supply Management (ISM) said today in its Services ISM Report on Business that services sector economic growth saw another strong month in May, reaching its highest level on record.

The reading for the report’s key indicator—the Services PMI (formerly the Non-Manufacturing PMI)—at 64 (a reading of 50 or higher indicates growth is occurring) —headed up 1.3% from April to May, with the index growing, at a faster rate, for the twelfth consecutive month, coupled with economic growth in the services sector also growing for the twelfth month in a row, with services sector growth intact in 134 of the last 136 months. The previous monthly high was March’s 63.7.

The Services PMI is up 5.4% compared to the 12-month average of 58.6, with May marking its highest reading over that period and February’s 55.3 marking its lowest reading over that period.

ISM reported that each of the 18 sectors it tracks saw gains in May, including: Retail Trade; Wholesale Trade; Construction; Arts, Entertainment & Recreation; Transportation & Warehousing; Real Estate, Rental & Leasing; Mining; Finance & Insurance; Management of Companies & Support Services; Utilities; Other Services; Information; Accommodation & Food Services; Health Care & Social Assistance; Agriculture, Forestry, Fishing & Hunting; Public Administration; Professional, Scientific & Technical Services; and Educational Services.

The report’s equally weighted subindexes that directly factor into the NMI were mostly up in May, including:
-business activity/production increased 3.5%, to 66.2, growing, at a faster rate, for the 12th month in a row, with all 18 service sectors reporting growth;
-new orders eked out a 0.7% increase, to 63.9, growing, at a faster rate, for the 12th month in a row, with all 18 service sectors reporting growth;
-employment fell 3.5%, to 55.3, growing, at a slower rate, for the 5th straight month, with 10 services sectors reporting growth; and
-supplier deliveries, at 70.4 (a reading of 50 or higher indicates contraction), slowing, at a faster rate, for the 24th consecutive month

Comments in the report submitted by ISM member respondents provided an overview of different factors at play in the services sector, including improving business conditions as more people receive the COVID-19 vaccine, cost increases and long lead times, and transportation and logistics-related issues.

Tony Nieves, chair of the ISM’s Services Business Survey Committee, said in an interview that a main driver for the strong report was all 18 services sectors reporting growth in May.

“That is really big right there,” he said. “And the 3.5% increase in business activity also was huge. It is also interesting to see that wages have increased to more than pre-pandemic levels. So that, coupled with stimulus money, leads to people having more money to spend, at a time when there is a lot of pent-up demand all across the board.”

Nieves said that there is no question that these results are exceeding expectations compared to late last year, which indicated that the second half of 2021 would be better than the first half of 2021, which subsequently became the case.

“How do you do much better than this?” he said. “Things will level off at some point, it is not different than any other business in that way like it is in any business cycle. It can’t keep increasing at this rate of growth. Keep in mind that any [Services PMI] reading above 50 is good, so even if it dropped down 10 percent, it is still ahead of where we were the month before.”

With more people getting vaccinated and pent-up demand for services economy-related businesses coming to fruition, at a time when the labor pool is tight, Nieves said that the labor pool for services is tighter than it is for manufacturing.

“The sector is more reliant on services, and even though there are people collecting unemployment and stimulus checks, these unemployment claims keep decreasing,” he said. “There was a short labor pool even before the pandemic, so this is just exacerbating it.”

When asked about the state of supplier deliveries that have slowed for 24 straight months, Nieves quipped that there will not be faster deliveries anytime too soon.

“There are a lot of issues, with port congestion, container availability, limited trucks and truck drivers, weather-related issues, and shortages of circuit boards, chips, and metals,” he said. “All of this is becoming a challenge right now. Look at what it has done to prices [up 3.8% to 80.6], it is amazing.”

Looking ahead to the summer months, Nieves said that it is hard to tell if more record months are on the way.

“Historically, we see things wane in the summer,” he said. “There are plant shutdowns for holiday vacations, and people doing more leisure-based things, so we usually get a bit of a lull in the summer, with things picking up again in the fall, as people start re-engaging. I don’t think there will be a lull. We might see some slight pullback for the next few months, but I think because everyone has been locked down so much, with things limited for so long, that they will continue on this trend. And, if anything, supply will catch up to demand, in some fashion, but probably not anytime soon. There is a chance that things could remain this way for the next four-to-six months.”

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