Key Highlights

  • Services PMI rose to 54.5 in May, above the forecast of 53.8 and the 12-month average of 52.8.
  • Prices index reached 71.3, the highest since August 2022, with no commodities down in price for a third straight month.
  • Employment contracted for a third consecutive month as hiring freezes spread across industries.
  • Business Activity and New Orders accelerated; Inventories tied their highest reading since 1997.
  • Seventeen of 18 industries reported growth; only Real Estate, Rental and Leasing contracted.

Expansion Firms, But the Composition Warrants Attention

The US services sector expanded for a 23rd consecutive month in May 2026. The ISM Services PMI registered 54.5 percent, up from 53.6 percent in April, above market expectations of 53.8 percent, and 1.7 percentage points above the 12-month average. The reading is historically consistent with annualised real GDP growth of approximately 2 percentage points. Business Activity rose 1.8 percentage points to 57.7 percent, its second-highest reading since October 2024, driven by data centre Demand and infrastructure Investment. New Orders climbed 3.8 percentage points to 57.3 percent, the strongest reading in 12 months. Seventeen of 18 industries expanded, three more than in April. The Inventories Index surged 9.4 percentage points to 62.5 percent, tying May 2010 as the highest reading since data collection began in 1997, likely reflecting pre-emptive stock-building. Inventory Sentiment remained close to its annual average, indicating businesses view current levels as appropriate.

Employment Contraction Signals a Structural Shift

The Employment Index registered 47.9 percent in May, contracting for a third consecutive month and 0.5 percentage points below its 12-month average. Ten industries reported declining employment, including Finance and Insurance, Health Care, and Transportation.

Respondents cited hiring freezes and deliberate decisions not to backfill vacancies. One respondent cited AI-related displacement in Supply planning. Demand growth appears to be absorbed through productivity and existing headcount rather than new hires, with implications for wage dynamics and Fed deliberations.

Prices: The Most Consequential Data Point

The Prices Index rose to 71.3 percent, the highest since August 2022, and has exceeded 60 percent for 18 consecutive months. No Commodity was down in price for a third straight month. Labour was the most cited driver. Fuel-related commodities, including diesel, gasoline, and petroleum-based products, reappeared after being absent in April, attributed to Tariff policy and the Middle East conflict. Aluminium and copper continued multi-month increases.

The Supplier Deliveries Index eased to 55.2 percent but remained in slower-delivery territory for an 18th consecutive month, still 2.1 points above its annual average.

Conclusion

May's ISM Services data confirms an expansion that is broad and currently accelerating on key demand indicators. The fault lines, however, are increasingly visible: price pressures are intensifying, employment is softening, and geopolitical cost transmission through fuel and freight is an active input rather than a Tail risk. For the Federal Reserve, firm activity alongside persistent Inflation narrows the path for near-term policy easing. The expansion is intact; the conditions sustaining it are becoming progressively more expensive.