What does the decline of the US service PMI below the boom-bust line indicate?

Recently, the non-manufacturing PMI data released by the Institute for Supply Management (ISM) in May triggered severe fluctuations in the global financial market. The index plummeted from 50.3 in April to 49.9, falling below the 50-point threshold for the first time since June 2024, marking the official entry of the service industry, which accounts for about 80% of the US economy, into a contractionary range. This data not only exacerbated the market's concerns about the US economic recession, but also led to a one-day decline of about 10 basis points in the 10-year US Treasury yield, the largest decline since April, reflecting investors' deep concerns about the economic outlook.

Among the five core sub-indices of the ISM non-manufacturing PMI, the new orders index plummeted from 52.9 in April to 46.4, the lowest level since January 2023, directly reflecting the reduction of spending by enterprises due to trade policy uncertainty. The business activity index also dropped from 50.7 in May to 49.2, indicating a significant weakening in the willingness of service industry enterprises to expand. Although the employment index remained in the contraction range of 47.1, the phenomenon of excess inventory of customers further exacerbated the suppression of short-term economic activities. The chairman of ISM pointed out that the current data more reflects the concerns of enterprises about the trade environment rather than the signals of deep recession, but the continuous accumulation of customer inventories may further drag down demand in the coming months.

The weak data of the service PMI directly impacted the global financial market. The US dollar index fell 0.4% immediately, losing the 99 mark, while spot gold rose 0.8% in the short term, standing above the $3,380/ounce mark, showing investors' pursuit of safe assets. The US stock market showed a pattern of differentiation: the Dow Jones Industrial Average fell slightly by 0.2%, while the Nasdaq Composite Index closed up 0.3% under the support of technology stocks, reflecting the market's game of economic slowdown and the relative resilience of technology stocks. In the bond market, the sharp decline in the yield of 10-year US Treasury bonds not only lowered the financing costs of enterprises, but also led to the expectation of the Fed's monetary policy turning.

The contraction of the service PMI is closely related to the tariff policy of the Trump administration. Corporate surveys indicate that tariffs have led to weakened demand, disrupted supply chains, and increased costs, resulting in a further decline in export orders, with the service industry being particularly affected. Although the manufacturing PMI rebounded to 52.3 in May, a three-month high, this growth may be short-term - some factories have increased production before the tariffs took effect, leading to short-term expansion. However, the services sector, the main driver of the US economy, contracted for the first time in two years, signaling that the uncertainty of the Trump administration's policies has had a substantial impact on orders and business expectations.

The weak data of the service PMI further exacerbated the market's concerns about the fiscal situation in the United States. The tax reform and spending bill promoted by the Trump administration has led to a reduction of federal tax revenue by about $4 trillion by 2034, and the cost may double in ten years. Musk publicly criticized the bill as "disgusting," saying it would increase the budget deficit to $2.5 trillion. Meanwhile, the risk of stagflation in the US economy is rising, with multiple economic data showing signs of slowing growth, while inflationary pressure persists. If the policies of high tariffs and large-scale deficits continue to be implemented, it will not only exacerbate the risk of domestic economic stagflation, but also may trigger global financial market turmoil.

The weak data of the US service PMI may trigger a wave of trade protectionism worldwide. If other countries follow the example of the United States and adopt tariff measures, the global trade environment will further deteriorate. The EU has quickly taken countermeasures and decided to impose tariffs on US goods worth 26 billion euros, but Lagarde pointed out that the eurozone economy is highly dependent on global trade, and the risk of supply chain disruption will inhibit investment and consumption. At the corporate level, the three major automobile manufacturers in the United States are urgently lobbying the government to exempt some parts from tariffs, while the beer industry is also facing a 25% import tariff shock. Such chain reactions highlight the limitations of unilateral policies.

Faced with the weak data of the service industry PMI, the Federal Reserve may be forced to re-evaluate the path of monetary policy. If the European Central Bank cuts interest rates as scheduled in June and the Federal Reserve maintains a hawkish stance, the dollar index may be further pressured, and the demand for safe-haven assets such as gold will continue to heat up. At the same time, global investors need to pay close attention to the evolution trend of the US fiscal deficit and the long-term impact of trade policy on the global supply chain. In the context of deep globalization adjustment, any unilateral policy may trigger a chain reaction, and only through dialogue and collaboration can sustainable economic recovery be achieved.

The decline of the US service PMI below the boom-bust line is not only a signal of economic slowdown, but also an epitome of the restructuring of the global trade system. Under the dual pressures of trade protectionism and fiscal deficits, whether the US economy can achieve a soft landing through policy adjustments will become a core concern for the global market in the future.