Services Growth Stays Firm as Prices Hit 2022 High
May’s ISM services report showed the U.S. economy still expanding, with new orders and business activity both strengthening. But the prices index climbed to its highest level since 2022, keeping inflation worries alive and making a near-term Fed rate cut look less likely.
U.S. services activity remained solid in May, with the ISM Services PMI rising to 54.5 and new orders accelerating, signaling the economy still has momentum. But the prices index jumped to 71.3, its highest since August 2022, reinforcing that inflation remains sticky and likely keeps the Federal Reserve cautious on rate cuts.
U.S. services data for May delivered a message the Federal Reserve will not love: growth stayed firm, but price pressure stayed hotter. The ISM Services PMI rose to 54.5 while the prices index held at a punishing 71.3, a mix that keeps the economy out of recession talk but keeps rate-cut hopes on a short leash.
Key Takeaways
ISM Services PMI rose to 54.5 from 53.6 and beat the 53.8 estimate, showing the U.S. services sector kept expanding in May.
New orders jumped to 57.3 from 53.5, while business activity climbed to 57.7 from 55.9, pointing to stronger near-term demand.
The ISM services prices index increased to 71.3 from 70.7, its highest level since August 2022, keeping inflation pressure front and center.
Services employment slipped to 47.9 from 48.0, extending contraction and showing hiring still lags demand.
S&P Global Composite PMI came in at 51.5 versus 51.7 prior, which confirms expansion but paints a cooler picture than ISM.
ISM Services PMI Shows Stronger U.S. Service Sector Growth in May
The headline number was straightforward. ISM Services PMI rose to 54.5 in May from 53.6 in April and beat the 53.8 consensus. That was a 0.9-point monthly gain and the strongest reading since February 2026.
More important, the index stayed above 50 for a 23rd straight month. In plain English, the biggest part of the U.S. economy is still expanding. That matters because services drive a large share of consumer spending, hiring, and inflation.
The internals were even stronger than the headline. New orders rose to 57.3 from 53.5 and crushed the 52.8 estimate. Business activity climbed to 57.7 from 55.9 and beat the 55.0 forecast. Those are not recession numbers. They describe an economy that still has demand, even if it is not running cleanly.
“In May, the Services PMI registered 54.5 percent, an increase of 0.9 percentage point compared to April’s figure of 53.6 percent.” — Steve Miller, ISM
There is also a useful historical angle here. ISM said new orders have expanded for 12 straight months, and the May reading of 57.3 moved above the 12-month average of 54.7. April had already shown a sharp drop from March, so May looked less like a fresh boom and more like a solid rebound after a wobble.
Sticky Services Inflation Keeps Fed Rate Cut Hopes Under Pressure
The most important policy signal sat in prices. The ISM services prices index rose to 71.3 from 70.7 and matched the consensus. That level is still extremely high, and it marked the highest reading since August 2022.
ISM also said prices paid have increased for 108 straight months, and all 18 industries reported higher prices in May. That is the kind of breadth central bankers notice. Inflation is one thing when it sits in a narrow pocket. It is another when nearly every corner of the service economy is paying more.
This is why the report reads as mildly hawkish for Fed policy. Stronger activity and stronger orders reduce the case for quick easing. Meanwhile, a prices index in the low 70s does not fit neatly with a fast return to the Fed’s 2% inflation goal.
Broader market rates data reinforce that backdrop. The effective federal funds rate stood at 3.63 in May, down from 4.33 in July 2025, so policy has already eased from last year’s levels. Yet this services report argues against rushing further. When demand stays firm and prices stay hot, the Fed has little reason to act like the fire is out.
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New Orders Up but Services Employment Still Contracts
The cleanest tension in the report was the split between demand and hiring. Services employment slipped to 47.9 from 48.0 and missed the 48.1 estimate. That kept the index below 50, which means contraction.
ISM said only 6 industries reported employment gains, while 10 reported declines. So businesses are still seeing orders come in, but they are not rushing to add workers. That often means executives want revenue without taking on more fixed cost. It is a cautious stance, not a panicked one.
Other labor data fit that cooler hiring picture. The U.S. unemployment rate was 4.3% in April, unchanged from March and up from 4.3% in January after touching 4.4% in February. Initial jobless claims also moved up to 215,000 for the week of May 23 from 199,000 at the start of May. Those numbers do not signal a labor break, but they do show less heat than the demand side of the ISM survey.
That split matters for markets. A hot growth report with weak hiring is awkward. It says the economy still has momentum, but businesses remain careful. In other words, the engine is running, though management is still checking the fuel gauge.
S&P Global Composite PMI Shows Growth, but Less Momentum Than ISM
The second major business sentiment reading told a softer story. S&P Global’s U.S. Composite PMI came in at 51.5 in May, down from 51.7 and below the 51.7 estimate. That is still expansion, but only modestly so.
This gap between ISM and S&P Global matters because it tempers the temptation to call the services economy red hot. ISM showed clear strength in orders and activity. S&P Global showed growth that was still positive but slower. Put together, the better conclusion is moderate expansion with sticky inflation, not a fresh surge.
That broader macro picture lines up with other recent data. Real GDP rose to 24,152.656 in the first quarter of 2026 from 24,055.749 in the prior quarter. Retail sales also increased to 656,115 in April from 653,040 in March. At the same time, consumer sentiment fell to 49.8 in April from 53.3 in March. Consumers are still spending, but they are not exactly cheerful about it.
“U.S. services sector activity picked up in May as businesses preemptively placed orders and rebuilt inventories in anticipation of shortages and higher prices because of the war with Iran.” — Reuters
That Reuters framing helps explain why growth and inflation rose together. Firms were not just serving current demand. They were also pulling activity forward to guard against supply disruption and higher input costs. That can support near-term growth while making inflation look even more stubborn.
May’s services data did not describe a weak economy. They described a resilient one with an inflation problem that refuses to leave quietly. Stronger ISM activity, surging new orders, and a prices index at 71.3 keep the Fed in a cautious posture, especially with hiring still soft rather than collapsing.
▌Common Questions
Frequently asked questions
+What did the ISM Services PMI show for May?
The ISM Services PMI rose to 54.5 in May from 53.6 in April, beating expectations and signaling continued expansion in the U.S. services sector. It marked the 23rd straight month above 50, which means services activity is still growing.
+Why is the ISM services prices index important for the Fed?
The prices index climbed to 71.3, its highest level since August 2022, showing that inflation pressure in services remains intense. That makes the Federal Reserve less likely to cut rates quickly because price growth is still too hot.
+What does the rise in new orders mean for the economy?
New orders jumped to 57.3, which suggests demand in the services economy strengthened in May. That is a positive sign for near-term growth because businesses are still seeing enough incoming work to support expansion.
+Why did services employment remain weak even as demand improved?
Services employment stayed below 50 at 47.9, meaning hiring continued to contract even as orders and activity improved. Companies appear willing to meet demand without adding many workers, which points to cautious hiring behavior.
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