U.S. Services Sector Contracts for First Time in Nearly a Year

In May 2025, the U.S. services sector saw its first contraction since June 2024, according to the latest Services ISM Report on Business.

In May 2025, the U.S. services sector saw its first contraction since June 2024, according to the latest Services ISM Report on Business. The Services PMI fell to 49.9%, just under the 50% threshold that separates growth from contraction. This marks only the fourth contraction in the past 60 months since the post-pandemic recovery began in June 2020.

Softening Demand and Activity Indicators

Services PMI: 49.9%, down from 51.6% in April
Business Activity Index: 50.0%, falling 3.7 points from April’s 53.7%
New Orders Index: 46.4%, down 5.9 points, entering contraction for the first time in nearly a year
Employment Index: 50.7%, returning to growth with a 1.7-point increase from April
Supplier Deliveries Index: 52.5%, rising for the sixth consecutive month, signaling slower deliveries
Inventories Index: 49.7%, slipping back into contraction after expanding in April
Backlog of Orders Index: 43.4%, the lowest since August 2023
Inventory Sentiment Index: 62.9%, the highest level since July 2024

Prices Surge on Tariff-Driven Costs

The Prices Index rose to 68.7%, an increase of 3.6 points from April and the highest reading since November 2022. This marks a two-month surge of 7.8 points, the sharpest rise since early 2021. Respondents pointed to tariffs as a key driver of supplier cost increases.

Industry Performance Diverges

Ten services industries reported growth in May:

Accommodation and food services
Arts, entertainment and recreation
Public administration
Mining
Utilities
Educational services
Real estate, rental and leasing
Information
Health care and social assistance
Professional, scientific and technical services

Eight industries reported contraction:

Other services
Retail trade
Management of companies and support services
Agriculture, forestry, fishing and hunting
Finance and insurance
Construction
Transportation and warehousing
Wholesale trade

Outlook and Business Sentiment

Although the overall PMI suggests only a marginal contraction, it highlights growing uncertainty among businesses. The average PMI for the last three months was 50.8%, compared to 52.8% over the prior nine months. The drop in new orders and the rise in input costs, especially due to tariffs, are making forecasting and planning difficult for many firms. Several respondents noted they are delaying or reducing orders while waiting for greater clarity in trade policy and demand trends.

Source: ISM

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