US services sector shrinks as higher prices plague many businesses

The US services sector contracted for the first time in nearly a year in May while businesses paid higher prices for inputs, a reminder that the economy remains in danger of experiencing a period of very slow growth and high inflation.

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The survey from the Institute for Supply Management (ISM) on Wednesday showed uncertainty was the dominant theme among businesses as they tried to navigate President Donald Trump's constantly shifting trade policy.

The whiplash from the tariffs that Trump has announced, paused, and imposed has left most businesses in limbo and struggling to plan ahead, to the detriment of the economy. The Trump administration has given US trading partners until Wednesday to make their “best offers” to avoid other punishing import levies from taking effect in early July.

“Until there is clarity on the trading environment, it appears that the business sector will remain wary of putting money to work,” said James Knightley, chief international economist at ING.

The ISM said its nonmanufacturing purchasing managers index (PMI) dropped to 49.9 last month, the first decline below the 50 mark and lowest reading since June 2024. It stood at 51.6 in April.

Economists polled by Reuters had forecast the services PMI would rise to 52.0 following some easing in the U.S.-China trade tensions. A PMI reading below 50 indicates contraction in the services sector, which accounts for more than two-thirds of the economy. The ISM associates a PMI reading above 48.6 over time with growth in the overall economy.