The May ISM reports show that the U.S. economy is still growing, and growth is becoming more widespread across both manufacturing and services. However, cost pressures remain elevated and are now spreading into services, and the labor market continues to show signs of weakness even as overall activity improves.
Manufacturing: Solid Growth, Rising Costs, and Soft Employment
The ISM Manufacturing PMI rose to 54.0 in May from 52.7 in April, marking the fifth straight month of growth and the strongest reading in this cycle. Demand improved over the month, as new orders rose to 56.8 from 54.1, production increased to 54.3 from 53.4, and export orders moved back into growth at 50.6 after declining in April. Growth also became more broad-based, with all six major manufacturing industries reporting expansion, up from four in the previous month.
The quality of this demand also improved relative to April. In last month’s report, the ISM chair noted that a portion of demand appeared to reflect customers ordering ahead of anticipated price increases rather than strength in underlying demand. This month the ISM chair had a more positive outlook on growth, explaining that May’s increase in new orders and production appears to reflect pent-up demand rather than inventory stockpiling.
This acceleration in demand has been paired with elevated inflation and continued weakness in the labor market, however. The Prices Index fell slightly to 82.1 from 84.6 but remains at a level that points to strong input cost inflation. The key question here is if this inflation is due to energy price spikes due to the Middle East Conflict, or other commodity related factors. Labor conditions also remain a weakness. Manufacturing employment improved slightly to 48.6 from 46.4 but has now been in contraction for 32 straight months. While labor improvement tends to lag new order growth, hiring has yet to respond to the recent trend of accelerating demand, suggesting that firms are currently meeting higher production levels by improving productivity rather than hiring more workers.
Services: One Strong Number Inside a More Complicated Report
The Services PMI painted a picture similar to Manufacturing. The Services PMI rose to 54.5 in May from 53.6 in April, above its 12-month average of 52.8, pointing towards robust growth in the sector. The New Orders index, which rose 3.8 points from April and the Business Activity index, which rose to 57.7 from 55.9 in April, also showed the strength of demand. Taken together, this is a solid result and suggests that services activity remains supportive of the broader economy.
However, like the manufacturing sector, this growth was accompanied by persistent inflation and stagnant labor conditions. The Prices Index increased to 71.3 in May, up from 70.7 April, and its highest level since 2022. This is particularly important because services inflation tends to be stickier than manufacturing because unlike goods, where prices adjust relatively quickly to changes in input costs, service prices are largely driven by wages and longer-term contracts, which do not reset as inputs fluctuate. The Employment Index also fell to 47.9 from 48.0, marking the third straight month of contraction. While the declines have been modest, this is worth monitoring given how important the services sector is for job growth.
What This Means for Investors
The May ISM data confirms that the U.S. economy is not just expanding but doing so more broadly than at any point in the current cycle. However, this growth is occurring alongside rising inflationary pressures that are no longer limited to manufacturing, and as the labor market continues to remain muted.
For investors, this environment continues to favor businesses with strong pricing power, disciplined cost management, and limited exposure to volatile input costs like commodities or imports. It also reinforces a more selective environment, where performance depends less on overall economic trends and more on how well individual companies manage pricing, margins, and efficiency.
Disclosure
This material is provided by Gryphon Financial Partners, LLC (“Gryphon”) for informational purposes only. It is not intended as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Facts presented have been obtained from sources believed to be reliable, though Gryphon cannot guarantee their accuracy or completeness. Gryphon does not provide tax, accounting, or legal advice. Individuals should seek such guidance from qualified professionals based on their specific circumstances.