Stronger May ISM Services Makes Weak April Look Like One-Off

The ISM Services report for May was surprisingly strong, with the headline index rising 4.4 points to 53.8 - the biggest one-month rise since January 2023, the highest reading since August 2023, and suggesting that April's sub-50 reading was an anomaly.

• This was a "goldilocks" report in the sense that activity indices were steady/higher even as the prices subindex moderated (a still-high 58.1 but down from 59.2 prior). Notably, the business activity/production category soared 10.3 points to 61.2 - joint-highest since December 2021.
• New orders rebounded 1.9 points to 54.1, new export orders soared 13.9 points to 61.8 (an 8-month high, and the biggest one-month increase since April 2023) with imports dropping 10.8 points to 42.8.
• The employment category, which will be very closely looked at ahead of Friday's nonfarm payrolls report, rose 1.2 points to 47.1, partially reversing a 2.6 point drop in April but still contractionary and below the Q1 average of 49.0.
• Backlogs and inventories grew slightly more slowly.
• The contributor anecdotes weren't exactly exuberant, with several citing softer demand and higher interest rates clouding the outlook.
• But along with a strong S&P PMI Services reading (+3.5 points to 54.8, confirmed in the final), May looks like it saw a solid rebound in services sector activity - in contrast to manufacturing, which saw a softer ISM reading.