Citi: ISM Signals Continued Growth but Soft Employment
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Citi highlights that the May ISM Services Index rose to 54.5, surpassing the market consensus of 53.8 and aligning with Citi's own forecast. This expansion was primarily driven by robust demand components, with the business activity index climbing to 57.7 and new orders increasing to 57.3. Combined with manufacturing data, the ISM figures indicate that US economic activity continues to grow at a pace consistent with recent months.
However, the employment components remain stuck in contraction territory. The services employment index edged down to 47.9, reflecting persistent corporate reluctance to expand hiring despite improving demand. This hiring hesitation aligns with depressed JOLTS hiring rates, suggesting that recent strong nonfarm payroll gains may decelerate over the summer as recruitment trails normal seasonal patterns.
On the inflation front, the ISM services prices index ticked up to 71.3, remaining elevated. Notably, manufacturing input prices are rising faster than service costs, indicating that pricing pressures are concentrated within the goods sector. While Citi has yet to observe significant pass-through from higher energy costs to core consumer inflation, persistently elevated input levels pose a clear upside risk to goods prices in the coming months. Crucially, wage growth has decelerated, meaning the labor market is not currently a primary source of US inflation pressure, even as the broader economic expansion continues.
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