Why ISM Services and ADP data diverge

GM. This is Milk Road Macro, the newsletter that you can tell wasn’t written by AI, because if it was, these jokes would be better.

Here’s what we’ve got for you today:

✍️ The service sector paradox.
✍️ Labor market equilibrium?
🎙️ The Milk Road Macro Show: Markets Are At All-Time Highs… But Liquidity Says Trouble Ahead w/ Michael Howell.
🍪 Amazon engineers support Seattle data center pause.

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Prices as of 10:00 a.m. ET.

THE SERVICE SECTOR PARADOX

The domestic service sector represents roughly 90% of the United States economy.

That’s a lot.

The Institute for Supply Management (ISM) Services PMI for May 2026 unexpectedly accelerated to 54.5%.

People don’t talk about this often enough, so I thought I would break it down.

This print at 54.5% was way higher than the consensus forecast of 53.7%. It also marked the 23rd consecutive month of this services PMI expanding.

Bullish, right?

Well, hold on there, let’s look under the hood.

The acceleration in top-line services activity is driven by – you guessed it – demand for data centers, commercial infrastructure growth, and capital projects. AI CapEx mostly.

Source: Reuters

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This pushed the Business Activity Index to 57.7% and the New Orders Index to 57.3%.

Again, that’s high.

Yet, despite this surge in demand, the Employment Index contracted for the third consecutive month, landing at 47.9%.

What’s causing this?

The respondents to the survey pointed to hiring freezes and a widespread refusal to backfill vacated positions. It seems like companies are hesitant to hire. This might be because they’re trying to replace jobs with AI. It might be because they’re just unable to afford it. But either way, it seems to be a trend.

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Source: Milk Road Macro

We call this “divergence.”

Strong demand alongside contracting employment.

The best explanation I have is price. I don’t know if you’ve noticed, but stuff is expensive.

The Prices Index climbed to 71.3%. This is the highest reading since August 2022, driven primarily by rising costs for diesel, gasoline, petroleum-related products, and freight.

Now, why would oil products suddenly cost more? Hmm. What a mystery.

To protect their operating margins from this oil price spike, service firms are aggressively limiting labor costs.

This margin squeeze is not localized to the United States. In Japan, May saw input business costs escalate to a 43-month high. Corporate profitability is increasingly reliant on productivity gains and labor suppression rather than organic employment growth.

This is just one example, but I wanted to walk through how this oil shortage is beginning to impact the real economy more than just saying, “gas prices are up.”

Thank you for your attention to this matter.

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LABOR MARKET EQUILIBRIUM?

Alright, so we discussed how service-sector firms are limiting new hiring, but the broader domestic labor market seems like it’s finding a kind of equilibrium.

The May ADP National Employment Report revealed that private employers added 122,000 jobs, a modest increase from April’s upwardly revised figure of 105,000.

This steady pace of job creation indicates that while the labor market is not overheating, it seems like it has enough momentum to support consumer spending without triggering a wage-price spiral.

Which is a very specific kind of economic tailspin that’s very bad.

WELCOME TO THE OTHER MILK ROAD MACRO TABLE OF STUFF I PUT IN THIS TABLE. 👇️

Source: Milk Road Macro

The critical macroeconomic takeaway lies in the wage metrics.

Source: ADP employment report

Annual pay growth for workers remaining in their current roles held flat at 4.4%.

Crucially, the pace of wage growth for job-changers moderated to 6.5%, down from 6.6% in April.

So, what? That’s almost no change. Why does that matter?

This slow cooling of wage gains for job switchers suggests that the labor market's structural tightness is easing.

This moderation in labor costs provides a buffer against the energy shocks threatening the inflation outlook. It suggests that domestic inflation remains primarily an oil crisis-driven issue rather than a demand-driven structural threat.

This means the Fed might have grounds to tilt more to the dovish side. It gives Warsh some ammunition to take into his first FOMC meeting to be able to say that we don’t need a rate hike.

That scenario is bullish and should keep the markets happy for longer.

Wrapping up

Okay, wow, we just broke down a lot of nerdy economic data. What have we learned?

First, we learned that the SpaceX construction workers all have cool lunchboxes.

Second, we learned that closing the Strait of Hormuz is impacting the global economy. It’s increasing the cost of doing business, which seems to be slowing down hiring globally.

At the same time, the ADP data suggests that the labor market problems are not a structural issue with demand, but just a result of these higher business costs due to oil shortages.

All in all, it looks like the economy is accelerating, and once the oil is flowing again, this friction should ease, and things will move faster.

A fancy way to say it would be something like, the global economic architecture is exhibiting a stark divergence, as financial assets trade near historic highs while the underlying macroeconomic plumbing experiences profound friction.

But here at Milk Road Macro, we say,

Stay safe, stay educated, and stay bullish!

ALL-TIME HIGHS, BUT LIQUIDITY SAYS OTHERWISE 🚨

In today's episode, we sat down with Michael Howell of Cross Border Capital to talk about why money and liquidity drive everything from markets to geopolitics, and why the calm may not last.

Here's what you'll hear:

Why global liquidity is quietly slowing even as markets sit at highs, and the medium-term turbulence regime Howell sees ahead.
How dollar stablecoins could accelerate capital flight and pile pressure on the euro, pound, and emerging-market currencies.
Why the EU could fracture as diverging fiscal paths and bond-market tensions expose its underlying fault lines.
Why China is stacking gold to back its RMB ambitions, and how slowing PBOC injections paused the rally.

Hit play and dive in 👇️

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