The U.S. service sector, which accounts for over two-thirds of the nation’s economic activity, contracted in May 2025 for the first time since June 2024, signaling a troubling economic shift. The Institute for Supply Management (ISM) reported its Services PMI dropped to 49.9, below the 50 threshold indicating contraction, driven by Trump’s escalating trade war, including 50% tariffs on foreign steel and aluminum effective June 4, 2025. This follows a first-quarter GDP contraction of 0.3%, attributed to a surge in imports as businesses stockpiled goods to avoid tariff costs. The service sector’s downturn, combined with earlier disruptions like the delayed USDA farm trade report and global trade tensions, underscores the broader economic fallout from Trump’s policies. This article explores the contraction, its causes, and potential consequences.
Service Sector Contraction: What’s Happening?
In May 2025, the ISM Services PMI fell to 49.9 from 51.6 in April, marking the first contraction in nearly a year. Key metrics highlight the strain:
- New Orders: Dropped sharply to 46.4 from 52.3, signaling reduced demand.
- Prices Paid: Surged to 68.7 from 65.1, reflecting higher input costs due to tariffs.
- Business Activity: Flat at 50%, indicating stagnation.
- Employment: Slightly up at 50.7, but growth remains weak.
The contraction aligns with earlier economic warnings, as businesses and consumers face uncertainty from Trump’s trade policies, including 145% tariffs on Chinese goods and the new 50% steel and aluminum tariffs. The surge in imports before these tariffs, up 41.3% in Q1 2025, widened the trade deficit, subtracting 4.83 points from GDP. Economists, like Morgan Stanley’s Ellen Zentner, warn of stagflation risks, with rising prices and slowing growth.
Trade War as a Key Driver
Trump’s tariffs, aimed at protecting U.S. industries, have disrupted supply chains and increased costs, impacting the service sector indirectly. Unlike goods, services are not directly tariffed, but higher input costs for industries like retail, hospitality, and logistics—reliant on imported materials—have reduced consumer spending power. The Budget Lab at Yale estimates tariffs will raise apparel prices by 33% and food by 4.5%, hitting middle- and lower-income households hardest, which curbs discretionary spending on services like dining and travel. Posts on X note job losses in retail and hospitality, with estimates of 142,000–500,000 jobs lost economy-wide due to tariff-related costs.
The service sector’s trade surplus, which reached $293 billion in 2024, is also at risk. Tourism Economics forecasts a 9.4% decline in international visitors in 2025, with a 20.2% drop from Canada due to trade tensions, costing $9 billion in visitor spending. Delta Air Lines reported plans to cut seats and payrolls, reflecting weaker travel demand.
Economic and Industry Impacts
The service sector’s contraction compounds concerns from the first-quarter GDP decline of 0.3%, the first in three years. Key impacts include:
- Job Losses: Employers in education, health, IT, and professional services cut jobs, with the Business Roundtable reporting reduced hiring plans.
- Consumer Spending: Slowed to a 1.8% growth rate in Q1 from 4.0% in Q4 2024, with households front-loading purchases like vehicles before tariffs hit.
- Global Ripples: The UK’s service sector also contracted in April 2025 (PMI 49.0), driven by Trump’s tariff uncertainty, while Canada faces a projected recession.
Trump denies tariffs caused the contraction, blaming the “Biden overhang,” but economists like Deutsche Bank’s Brett Ryan argue trade uncertainty has depressed hiring and investment. Peter Navarro, a Trump trade adviser, called the GDP drop “the best negative print” due to underlying consumer spending strength, but rising prices and job fears challenge this optimism.
What’s Next?
The service sector’s contraction raises recession fears, with polls showing growing voter pessimism about higher prices and economic stability. The Federal Reserve faces pressure as inflation risks rise, complicating rate decisions. Negotiations with China and exemptions for allies like the UK could ease tensions, but Canada and the EU are preparing retaliatory tariffs, which could further strain services like logistics and retail. Businesses should monitor PMI data and consumer sentiment, while consumers may face higher service costs, from healthcare to dining.
Call to Action
Feeling the pinch from rising prices or worried about the economy? Share your thoughts in the comments and stay informed with our newsletter. Visit the ISM or Commerce Department websites for the latest economic data.
Suggested Authoritative Sources
- Reuters – Coverage of service sector PMI and tariff impacts.
- The Hill – Historical context on service sector contractions.
- CNN Business – Insights on service sector trade surplus risks.
- The New York Times – Analysis of Q1 GDP contraction and trade war effects.
- Bloomberg – Details on economic shrinkage and consumer spending.
If you’d like a chart of PMI trends, deeper analysis, or a different tone, let me know!
