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ISM chart and excerpts below by permission from the Institute for Supply Management® ISM®

ISM is a diffusion index with numbers above 50 indicating expansion and below 50 contraction.

A weakness of diffusion indexes is direction matters more than amount. For example, a business hiring 2 people would offset a business firing 300.

Please consider the May 2025 Services ISM^® Report On Business^® emphasis mine.

Economic activity in the services sector contracted in May, the first time since June 2024, say the nation’s purchasing and supply executives in the latest Services ISM^® Report On Business^®. The Services PMI^® indicated slight contraction at 49.9 percent, below the 50-percent breakeven point for only the fourth time in 60 months since recovery from the coronavirus pandemic-induced recession began in June 2020.

The report was issued today by Steve Miller, CPSM, CSCP, Chair of the Institute for Supply Management^® (ISM^®) Services Business Survey Committee: “In May, the Services PMI^® registered 49.9 percent, 1.7 percentage points lower than the April figure of 51.6 percent. 

“The Prices Index registered 68.7 percent in May, a 3.6-percentage point increase from April’s reading of 65.1 percent; the index has elevated 7.8 percentage points in the last two months to reach its highest level since November 2022 (69.4 percent). This is the first time the index has recorded this high of a two-month increase since a 9.2-percentage point gain in February and March 2021. The May reading is also its sixth in a row above 60 percent.

Miller continues, “May’s PMI^® level is not indicative of a severe contraction, but rather uncertainty that is being expressed broadly among ISM Services Business Survey panelists. The average reading of 50.8 percent over the last three months still indicates expansion in that time period, but it is a notable shift of 2 percentage points below its average of 52.8 percent over the previous nine months. The New Orders Index moved into contraction territory for the first time in nearly a year. Tariff impacts are likely elevating prices paid by services sector companies, with the Prices Index hitting its highest level since November 2022, when the Bureau of Labor Statistics’ CPI indicated that prices had increased 7.1 percent as compared to November 2021. Respondents continued to report difficulty in forecasting and planning due to longer-term tariff uncertainty and frequently cited efforts to delay or minimize ordering until impacts become clearer.”

Respondent Comments

• “Tariff variability has thrown residential construction supply chains into chaos. Many items are still manufactured in southeast Asia, and suppliers are beginning to test the waters for increases. Major heating, ventilation and air conditioning equipment manufacturers are passing on their cost increases due to higher refrigerant and steel commodity prices. Planning is difficult for community projects that could be scheduled for the next 22 to 30 months.” [Construction]
• “Steady, with some signs of growth and opportunity.” [Finance & Insurance]
• “Federal budget cuts are affecting purchasing decisions.” [Health Care & Social Assistance]
• “Tariffs remain a challenge, as it is not clear what duties apply. The best plan is still to delay decisions to purchase where possible.” [Information]
• “Due to the tariffs, we’ve had had small price increases on our international raw materials, and some suppliers are holding back inventory to cover uncertainties. We’ve seen some slowdown in the production of new wells, but there has been an increase in restimulation of existing wells.” [Mining]
• “Life science startups continue to push forward on clinical trials and market launches. The level of investment grew this month. The impacts of tariffs are being watched but are not driving changes in strategic plans.” [Professional, Scientific & Technical Services]
• “The projects are slowly starting to be issued, albeit with a great deal of market uncertainty.” [Public Administration]
• “Business is strong. Consumer concerns over tariffs may be driving some demand.” [Retail Trade]
• “Tariffs have increased the cost of doing business. It’s too early to tell what the lasting impact of this will be. We have tried to budget for the increase, but it has been a moving target. Overall, we are seeing a leveling off in business activity; time will tell if this is temporary or long lasting.” [Transportation & Warehousing]
• “Business activity is increasing due to demand for data centers, commercial growth and infrastructure. Residential growth remains flat.” [Utilities]

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As for ISM, plunging orders and rising prices is quite stagflationary.

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