The ISM services index for May 2025 was recorded at 49.9, which is lower than the expected 52.0 and the previous 51.6. Key statistics include a rise in prices paid to 68.7, new orders falling to 46.4, and employment improving to 50.7. Business activity remained steady at 50.0, supplier deliveries increased to 52.5, and inventories dropped to 49.7. The backlog of orders decreased to 43.4, new export orders slightly fell to 48.5, while imports rose to 48.2. Inventory sentiment improved to 62.9. Despite some market worries, consumer spending remains stable, and government spending continues. The US dollar faced selling pressure, and Treasury yields fell by 2-4 basis points. The USD/JPY pair dropped by 80 pips, with 50 pips of this decline linked to these figures.

Mixed Sectoral Responses

The report mentioned challenges such as tariff changes affecting supply chains, uncertainties in purchasing due to budget cuts, and price increases in transportation. Some sectors noted steady business conditions and slight growth, especially in consumer demand for retail trade. The report highlights mixed responses across various sectors amid economic uncertainties. The unexpected drop in the services index for May, falling just below the neutral mark of 50.0, indicates a slight slowdown in non-manufacturing activities. Key indicators suggest a moderation rather than growth. Traders should view this data as a sign of pressures building in consumer industries and supplier networks. The decline in the headline figure, alongside falling new orders and stable business activity, implies that overall demand may be weakening more than expected. Pricing data has surprised by showing an increase, with prices paid rising significantly. This indicates that input costs continue to climb despite a general slowdown in activities, suggesting inflationary pressures are still present in this part of the economy. This rise in costs cannot be overlooked. It suggests that businesses are dealing with higher expenses while new order volumes are dropping—creating an unpredictable situation for their profit margins, especially in logistics-heavy sectors.

Employment and Trade Flows

The increase in employment might seem positive—showing modest growth—but when paired with a declining backlog and lower inventory growth, it complicates the picture. A stronger labor market can indicate ongoing demand, but in this scenario, it may reflect previous hiring that hasn’t yet adjusted to the slowing pace. New export orders and imports, while both below 50, indicate a cautious approach to trade, with neither showing major drops or increases. The minor retreat in Treasury yields appears more like a recalibration instead of panic. This slight move toward safety after a weaker report aligns with uncertainty rather than outright decline. The slight drop in the USD against the yen also seems influenced by adjusted growth expectations. It’s essential to pay attention to qualitative comments regarding specific challenges. There are mentions of tariff-related pressures creating unpredictability in procurement. Increases in transport costs may continue to affect logistics-heavy industries. Despite reports of steady consumer demand in areas like retail trade, these positives do not offset the overall weakness. Budget constraints are also highlighted, particularly from organizations facing internal cuts. This can affect purchasing schedules and volumes, which may soon influence inventory strategies. These data do not imply a recession yet, but they do signal warning signs. Activity is leveling off where it once was growing. We are closely monitoring when businesses shift from absorbing costs to passing them on, which may occur soon. Create your live VT Markets account and start trading now.

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