Services PMI Report Gets Surprising Lift

Rising backlogs and a complementary increase in hiring, both running near 3-year highs, gave a surprising lift to the services PMI. At 56.8 for final May, the index is up 2.2 points from April and, even more surprising, is up 1.1 points from the mid-month flash which suggests that conditions accelerated into month end. Output is also near a 3-year high with new orders just off a 3-year high.

The sample is having trouble sourcing raw materials, which hints at tariff effects, with tariffs directly cited for a 5-year high in input costs. The report confirms indications from the Federal Reserve's Beige Book that some of these costs are being passed through to selling prices which are at a 3-month high.

These results together with last week's PMI manufacturing report, which came in at 56.4, make for a substantial 1.7 point gain in the PMI composite to 56.6 vs 54.9 in April. All indications from the small sample reports like this one are pointing to May as a month of unusual strength.

PMI services generally lag by several points the ISM non-manufacturing index which is getting a major boost from two sectors not covered in PMI services: mining and construction.