The improvement occurred in large part due to stronger demand, which is a good sign
After service sector growth slowed significantly in April, it ticked back up in May. The Institute of Supply Management's Non-Manufacturing Index (NMI) increased to 54.6 from 52.8 in April. A reading above 50 indicates expansion. If the index had instead declined by just a few percentage points in May, it would have shown contraction. What drove the sector's improvement?
Here's the data from ISM:
For a qualitative understanding of the sector, compare the May "rate of change" column to that shown for April. You can see that the services industry looked a little bit better in May. Three sub-categories switched from growing slower in April to growing faster last month.
In fact, the three categories that improved faster are pretty important ones. New orders and new export orders both rose significantly in May. They appear to be most of the reason why the overall index increased. If demand is growing, so should jobs.
And actually, the third component that improved faster was employment. This might seem surprising, considering how weak hiring was overall in May. But one of the areas where the net job gains were the highest was professional and business services. So it appears that service jobs didn't suffer as much from the slowing growth as jobs in other sectors.
The other components that ISM tracks changed little during the month.
This report fits into the narrative of an uneven, choppy recovery. Although the economy began weakening in April, the indicators aren't all pointing in the same direction. So far in May, we've seen relatively poor auto sales, hiring, and manufacturing reports. But now we have another report indicating that the service sector is improving faster. In the months that follow, we'll have to see if the negative indicators begin to overwhelm the few positive signs out there, or if the recovery moves past the bump it appears to have hit, relatively unscathed.