Workers install kitchen cabinets inside a home under construction in Loudonville, New York.

U.S. service-sector activity picked up in May, even as businesses face the fastest growth in input costs in nearly four years. The Institute for Supply Management's (ISM's) services index rose to a three-month high of 54.5, according to data released yesterday. Readings above 50 indicate expansion.

Gauges of new orders and business activity both increased, signaling resilient consumer demand. Nearly every service industry reported growth in the month, including wholesale trade, entertainment and recreation, and construction. The only industry reporting a contraction was real estate and leasing.

The costs of services and materials for firms, meanwhile, continued climbing. The Iran war has sparked a new wave of inflation, driving up energy and transportation costs and disrupting supply chains around the world. ISM's prices-paid gauge rose to 71.3 last month, the highest since August 2022.

Businesses may eventually choose to pass those cost increases on to shoppers, who are already seeing higher prices at the gasoline pump and the grocery store. Some companies could also be seeking to stockpile materials if they're anxious about the availability of products or costs climbing further. The group's inventory index swelled in May, matching the highest on record.

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Select industry comments:

  • "We are seeing the dual effects of the administration's tariff policy dynamics and the conflict in the Persian Gulf affect our pricing. Suppliers across numerous industries are trying to pass price increases for fuel surcharges and increased input costs for resin-based products and the like. This is the definition of inflationary pressure starting to affect us. We expect significant cost increases to impact us by late second quarter and definitely in Q3."
    — Accommodation & Food Services
  • "Starting to see increased supply constraints and associated price increases, especially for construction materials and computers like laptops and tablets."
    — Educational Services
  • "Due to rising fuel costs, a major distributor has decided to hold freight with resellers until a new contract is negotiated that addresses these increased expenses. Unfortunately, this means there will be delays that will impact our internal projects."
    — Public Administration
  • "Capital expenditure energy projects continue to be delayed or revamped based on macroeconomic factors. Data-center power generation projects are driving demand and reducing available inventory across the piping market."
    — Wholesale Trade

With rising prices pressuring firms' bottom lines and Americans' incomes, there's a risk of intensifying wariness around hiring. The ISM's gauge of employment edged lower and indicated shrinking headcount at service providers for a third straight month.

"Respondents commented frequently that their companies had instituted hiring freezes or were not backfilling vacated positions; however, most industries reported that they were holding flat in employment month over month," Steve Miller, chair of the ISM Services Business Survey Committee, said in a statement.

The government's May jobs report will be released tomorrow.

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What Bloomberg economists say...

"The full scope of data in the May ISM Services report paints a somewhat different picture than the uptick in the headline gauge would suggest. Beyond new orders, demand softened in the month. Employment deteriorated and inventories accelerated, as did prices. All else equal, the May report sets the stage for a swift retreat in June."

— Stuart Paul

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