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U.S. service-sector activity expands at slowest pace since early 2021

The numbers: A closely-watched barometer of business conditions at service-oriented companies such as banks, retailers and hospitals fell 1.2 points to 55.9 in May, the Institute for Supply Management said Friday. This is the lowest reading since February 2021.

Economists polled by The Wall Street Journal had forecast a reading of 56.7%.

Numbers over 50 are viewed as positive for the economy and anything over 55 is considered exceptional.

Key details: The decline was led by a decline in business activity and slowing supplier deliveries. Business activity slumped 4.6 points to 54.5.

In a sign that supply-chain woes might be easing, supplier-deliveries fell to 61.3 and order backlogs fell to 52, both 14-month lows. Price pressures eased but remained elevated.

Employment rose back above 50 in May.

Big picture: The service sector is showing signs of weakening as the Federal Reserve begins to raise interest rates. However, Steven Stanley, chief economist at Amherst Pierpont, said firms are struggling to keep up with demand. “Supply-chain problems became less widespread in May but were still ubiquitous,” he said,

What are they saying? “Overall, service industry growth is decelerating but remains historically strong. While supply chain disruptions and margin pressures make the outlook highly uncertain, there are (so far) few signs that this slowdown is more than just an expected deceleration after heightened activity,” said analysts at Contingent Macro Advisors.  

Market reaction: Stocks
DJIA,
-1.11%

SPX,
-1.71%

were lower at the open after the strong jobs data. The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.953%

rose closer to 3%.

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