US ISM Services Index (May 2026)

Strong services price pressures will add to Fed’s concerns

The rise in the ISM Services Index in May, together with the latest rise in the manufacturing index, suggests that the economy is enjoying some renewed momentum and supports our view that GDP growth is on track to rebound to about 2% annualised in Q2. But the further rise in the prices paid index to its highest level since August 2022 points to a further rise in PCE core services ex-housing (“supercore”) inflation, which will validate those on the FOMC wanting to drop its easing bias and brings the Fed a little bit closer to consider interest rate hikes.  

The headline index rose to 54.5 from 53.6 in April. The detail was mostly positive, with the forward-looking new orders index jumping 3.8 points to 57.3, while the business activity index rose 1.8 points to 57.7. However, in contrast to the slight fall in the manufacturing prices paid index, the services prices paid index rose a further 0.6 points to 71.3, leaving our weighted average index for both sectors broadly unchanged at a historically high level.

The one obvious weak sport in the report was that the employment index remained below 50 for the third consecutive month, suggesting hiring activity remains weak. That said, the slightly stronger-than-expected 122,000 rise in May’s ADP private payrolls and the sharp rise in the JOLTS job openings in April could still be a sign that labour market conditions are starting to improve.