The taste of "stagflation": The US ISM Services PMI unexpectedly fell below the 50 "expansion-contraction line"
The US May ISM Services PMI unexpectedly fell to 49.9, dropping below the 50 expansion-contraction line for the first time, indicating characteristics of "stagflation": both business activity and new orders plummeted, while the prices paid index rose to a 30-month high. Barclays warned that the slowdown in economic growth and increasing inflationary pressures could limit the Federal Reserve's policy space and increase market uncertainty. Despite the overall PMI softening, the employment index still showed moderate growth in service sector employment
U.S. Services PMI Unexpectedly Slows, New Orders Plummet Alongside Soaring Prices, Barclays Warns of "Stagflation" Risks.
According to news from the Chase Trading Desk, Barclays' research report on June 4 shows that the U.S. ISM Services PMI unexpectedly dropped to 49.9 in May, falling below the 50 expansion-contraction line for the first time in nearly a year. This data exhibits typical "stagflation" characteristics: both business activity and new orders plummeted, while the prices paid index surged to a 30-month high.
This data combination sends complex signals to investors—economic growth is slowing, but inflationary pressures are intensifying, which may limit the Federal Reserve's policy space and increase market uncertainty.
"Stag" Alarm: Sharp Decline in Business Activity and New Orders
The U.S. ISM Services PMI fell by 1.7 percentage points to 49.9 in May, significantly lower than Barclays' expectation of 51.5 and the market consensus of 52.0, reflecting a clear weakening in overall service sector activity. This is the first time since June 2024 that the index has fallen below the 50 expansion-contraction line, marking the lowest level since the pandemic in 2020.
The weakness in the ISM Services PMI is primarily reflected in the significant declines in business activity and new orders.
The business activity index dropped by 3.7 percentage points to 50.0, while the new orders index plummeted by 5.9 percentage points to 46.4, with both indicators reaching their lowest levels since the pandemic in 2020.
"Inflation" Stubbornness: Price Pressures Reach 30-Month High
In stark contrast to the activity data, the prices paid index continued to climb, rising by 3.6 percentage points to 68.7, reaching the highest level since the post-pandemic supply chain crisis. Although still far below the peak of nearly 84 in March 2022, this reading has reached a 30-month high.
The report specifically notes that several input costs, including aluminum and steel (before tariffs were raised from 25% to 50%), labor, electrical equipment, and lumber, are rising, with labor and electrical equipment supplies being particularly tight.
Employment Performance Remains Acceptable
Barclays points out that despite the overall PMI softening, the employment sub-index reading of 50.7 still aligns with moderate growth in service sector employment and does not indicate signs of an impending softening in the labor market. This provides some support for the non-farm payroll report set to be released on Friday
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