U.S. service providers recorded an upturn in business activity for the third successive month during May, but the pace of expansion slowed since April and remained weaker than seen on average since the survey began in late-2009. At the same time, softer new business growth and reduced confidence regarding the year-ahead outlook contributed to a further moderation in job creation across the service sector.
The seasonally adjusted final Markit U.S. Services Business Activity Index posted 51.3 in May, down from 52.8 in April and well below the post-crisis average (55.6). Although signalling a further overall expansion in business activity, the latest reading was only marginally above the 50.0 no-change threshold. Survey respondents linked sluggish growth to weak spending patterns among clients and subdued underlying economic conditions.
The final seasonally adjusted Markit U.S. Composite PMI™ Output Index dropped from 52.4 in April to 50.9 in May, to signal the slowest expansion of private sector output since February.
Higher levels of service sector activity (index at 51.3) contrasted with a slight reduction in manufacturing production during May (index at 49.4).
In line with the trend for business activity, the latest survey highlighted a renewed slowdown in new business growth across the service sector in May. Moreover, the rise in new work was one of the weakest recorded since the start of 2015. Relatively subdued client spending provided firms with the opportunity to clear backlogs of work in May. Lower volumes of work outstanding have now been recorded for ten months running, which is the longest continuous period since the survey began.
Reduced pressure on operating capacity and weaker new business growth acted as a brake on job hiring in May. Weaker employment growth has now been recorded in three of the past four months, with the latest expansion in payroll numbers the slowest since January 2015. While firms continued to cite new product launches and long-term expansion plans as factors driving job creation, there were also reports that less favourable market conditions had led to more cautious hiring strategies.
May data highlighted a renewed fall in business confidence across the service sector. Moreover, the degree of optimism was the weakest since the survey began in October 2009. Survey respondents cited a range of factors weighing on business sentiment, including subdued new business growth, heightened uncertainty related to the presidential election cycle and general concerns about the economic outlook.
Meanwhile, the latest survey pointed to an accelerated pace of input cost inflation in May, which continued the general pattern seen so far in 2016. Higher fuel bills, commodity prices and food costs were mentioned in particular. Average prices charged by service providers increased only marginally in May, although the latest increase was still the fastest recorded since November 2015.
Chris Williamson, Chief Economist at Markit said:
The service sector reported one of the weakest expansions seen since the recession in May, adding to signs that any rebound of the economy in the second quarter may be disappointingly muted. (…)
Add these disappointing service sector numbers to the downturn now being seen in manufacturing, and the PMI surveys point to GDP growing at an annualised rate of just 0.7-8% in the second quarter, notwithstanding any marked change in June. (…)
The ISM Non-Manufacturing Index, much like its Manufacturing PMI, has declined markedly in May, confirming the suspicious readings of previous months and further undermining the credibility of the ISM surveys, at least relative to Markit’s.
The NMI® registered 52.9 percent in May, 2.8 percentage points lower than the April reading of 55.7 percent. This represents continued growth in the non-manufacturing sector at a slower rate. The Non-Manufacturing Business Activity Index decreased to 55.1 percent, 3.7 percentage points lower than the April reading of 58.8 percent, reflecting growth for the 82nd consecutive month, at a slower rate in May.
The New Orders Index registered 54.2 percent, 5.7 percentage points lower than the reading of 59.9 percent in April. The Employment Index decreased 3.3 percentage points to 49.7 percent from the April reading of 53 percent and indicates contraction after two consecutive months of growth. The Prices Index increased 2.2 percentage points from the April reading of 53.4 percent to 55.6 percent, indicating prices increased in May for the second consecutive month. According to the NMI®, 14 non-manufacturing industries reported growth in May.