US service sector growth cools as order growth drops by most in 3 years

May 5 (Reuters) – U.S. services sector expansion slowed for a second straight month in April as new order growth dropped by the most in three years and cost input pressures held at the highest since late 2022 amid the steep energy prices arising from the U.S.-led war against Iran, an industry survey showed on Tuesday.

The Institute for Supply Management’s nonmanufacturing purchasing managers index dropped to 53.6 last month from 54.0 in March. Economists surveyed by Reuters had estimated the index at 53.7. A reading above 50 indicates expansion in the vast services sector accounting for more than two-thirds of U.S. economic activity.

The survey’s measure of business activity actually ticked up 2 points to 55.9, but other components were more downbeat. 

The new order index fell to 53.5 from a three-year high of 60.6 in March, with the 7.1-point drop being the largest since March 2023. Cost pressures did not abate either, as the prices paid index sat unchanged at 70.7, matching a level last seen in October 2022 when the post-pandemic inflation wave was just beginning to abate.

The Iran war has not only pushed up energy prices – motor vehicle fuel prices as measured by AAA are at their highest since the summer of 2022 – but has also caused supply chain snarls that are lengthening delivery times for key business materials. ISM’s supplier delivery index, which rises as delivery times grow longer, rose to 56.8 – the highest since July 2022 – from 56.2 in March.

Employment also remained negative, holding below the 50-mark for a second straight month at 48.0 in April versus 45.2 the month before.

(Reporting By Dan Burns; Editing by Chizu Nomiyama )