US services sector growth picks up in May; businesses face higher prices for inputs

[WASHINGTON] US services sector activity picked up in May, as businesses pre-emptively placed orders and rebuilt inventories in anticipation of shortages and higher prices because of the war with Iran.

The Institute for Supply Management (ISM) said on Wednesday (Jun 3) its non-manufacturing purchasing managers’ index (PMI) increased to 54.5 last month from 53.6 in April.

Economists polled by Reuters had forecast the services PMI rising to 53.8.

A reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of US economic activity.

The three-month US-Israel war with Iran has severely disrupted the shipping of commodities and raised prices of goods including energy, aluminium and fertilisers.

The rise in the services PMI mirrors an increase in manufacturing activity reported by the ISM this week.

The survey measure of new orders received by services businesses jumped to 57.3 from 53.5 in April. A gauge of services sector inventories soared to 62.5 from 53.1 in the prior month.

Business inventories have been drawn down for four straight quarters, the longest such stretch since the Great Recession.

But growth in backlog orders slowed, as did exports. The survey’s measure of prices paid by businesses for inputs increased to 71.3 from 70.7 in the prior month, an indication that the oil price shock has continued to spill over to the services sector.

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Inflation increased at its fastest pace in three years in April, the government reported last week.

Financial markets expect the Federal Reserve to keep its benchmark overnight interest rate in the 3.5 to 3.75 per cent range into next year.

The survey’s measure of supplier deliveries eased to a still-high 55.2 from 56.8 in April. A reading above 50 indicates slower deliveries.

The elevated reading likely contributed to the rise in the services PMI, as the economy strengthens and demand increases. But in this instance, strained supply chains are driving the rise in delivery times.

Services sector employment remained subdued. ISM has noted an uptick in “attrition”.

Its employment gauge has, however, not been a good predictor of private services payrolls in the Labor Department’s closely watched employment report.

Non-farm payrolls have posted back-to-back months of gains above 100,000. Payrolls likely increased by 85,000 jobs in May after rising 115,000 in April, a Reuters survey of economists predicted.

The unemployment rate is forecast holding steady at 4.3 per cent. REUTERS