ISM: US Services Sector Slips in March on Surging Costs amid Trump Trade War, Controversial Massive Federal Spending Cuts, but Clings to Growth

–ISM Services Index at 9-Month Low of 50.8 Vs. 53.5 in February, Below Consensus (53.0)
–Employment Subindex Plunge by 7.7 Points Sharpest Since Early Pandemic Phase of April 2020
–ISM’s Miller: More Industries Are Concerned About Impact of Tariffs
–Miller: Canadian Boycott of US Goods, Services Having Immediate Impact
–Miller: Services Sector Shows Some Strength from Overall Viewpoint

By Max Sato

(MaceNews) – The U.S. services sector stumbled in March at the start of a global trade war and massive federal spending cuts launched by the Trump administration but managed to stay just above water, thanks to resilient demand for travel and eating out and consumer spending at retail stores, data from the Institute for Supply Management showed Thursday.

The ISM index, which shows the directional change of economic activity, fell 2.7 percentage points to a nine-month low of 50.8 in March after rising 0.7 points to 53.5 in February, coming in much weaker than the consensus call of 53.0. The latest figure indicates the sector grew for the ninth straight month but the index was also below its 12-month moving average of 52.4, underperforming by that measure for three months in a row.

The sluggish results were mainly caused by a much slower increase in new orders and a plunge in employment, which were partially offset by solid services output by most of the industries polled by the ISM. The employment subindex plunged by 7.7 points, the largest decline since April 2020 at the initial phase of the pandemic, when it tanked 17.2%

“There has been a significant increase this month in the number of respondents reporting cost increases due to tariff activity, “Steve Miller, chair of the ISM Services Business Survey Committee, said in a statement. “Despite an increase in comments on tariff impacts and continuing concerns over potential tariffs and declining governmental spending, there was a close balance in near-term sentiment, between panelists with good outlooks and those seeing or expecting declines.”

Miller told reporters that the tariffs are worrying more firms. The number of the total 18 services industries covered by the ISM that expressed concerns over the trade front continued increasing to 16 in March from 14 in February and 10 in January, he said. Only two industries – mining plus arts, entertainment and recreation – have not expressed tariff worries so far.

The higher duties on imports have boosted various costs for the services sector which accounts for roughly 30% of the U.S. gross domestic product.

Miller had no direct comments on Wednesday’s announcement by President Donald Trump that he was imposing “reciprocal tariffs” on many trading partners, particularly targeting those that have a surplus with the United States, in sharp contrast to the Republican drive to drop the existing trade barriers and push for freer world trade in the 1980s under Presidents Ronald Reagan and George Bush. The Trump actions have some similarities to the Democrats’ approach in the 1990s except the latter tried to trim the U.S. trade deficit through negotiations. President Bill Clinton failed to win Japanese agreement to set numerical targets in bilateral trade. Instead, Japanese carmakers set “voluntary” goals to buy U.S.-made auto parts.

In retaliation to the Trump actions, Canada’s federal, provincial and municipal governments and some businesses are boycotting American goods and services, having immediate effects on both the supply and demand sides.

That is showing in the continued high level of the prices paid subindex above 60 (the 12-month moving average is 59.5) and the plunge in the new export orders to a two-year low of 48.5 (the first contraction in four months), Miller noted. “I think we can safely say that there is a significant impact on the demand side related to some of the recent actions,” he said.

Uncertainty over exactly what the U.S. administration will do in what areas of policymaking has pushed many service providers to the sidelines, prompting them to hold off on filling open positions and leading them to lay off contract workers, according to the ISM.

On the slightly brighter side of the report, Miller said the new orders subindex, which stood just above the neutral line of 50 in March, indicates there is “good strength” and “limited concern” over the implications of the trade conflicts.

“If I can match the business activity (above 50 at three-month high) with employment (below 50 at six month-low), it looks like there is good strength from an overall business standpoint,” he said. “There is limited concern or some concern over the exports side (below 50 at four-month low). We saw a significant drop there.”

“But it looks like most of the employment impact was not layoffs and downsizing were reductions related to reduce business other than those sectors that are impacted by federal spending (cuts),” he said. The affected industries include education, information and personnel management as projects have been cancelled and federal budget cuts formed them to reduced headcounts.

Among comments from the March report, a firm from the accommodation and food services category said, “Restaurant sales and traffic have improved in the past month overall. We remain optimistic about the coming months, despite recent news of possible recession and tariffs that have not played out yet.”

Elsewhere, companies were either scrambling to cope with the spike in costs or bracing for more trade storms to come last month.

“Tariff confusion and the variety of ways that suppliers are responding have had a strong effect on our purchasing decisions this month, causing us to shift spend and in some cases buy in advance of reported tariffs,” a wholesale trader said. “We’re expecting price increases in the near future due to tariffs on several commodity-based contracts, including waterworks items,” said a utility provider.

The stiff duties imposed by the president on imports from Canada and Mexico, close U.S. trading partners, already jacked up import costs last month. A construction firm told the ISM survey that it began to “see effect of aluminum tariff.”

The Trump tariffs on imports from Canada are also wreaking havoc on book publishers that use tons of groundwood paper, which is less expensive than chemical pulp paper. A company in the information industry complained that “U.S. mills are getting backlogged and late from the additional tonnage they’ve taken on.”

Unlike the manufacturing sector, some services industries – particularly education providers – are having a direct hit from the Trump administration that is seeking to narrow the federal budget deficit by $1 trillion. Elon Musk, a billionaire who has been financing the Trump agenda, and his Department of Government Efficiency are slashing payrolls in crucial public services including food safety inspection and disease control, canceling contracts and ending leases. The move has triggered outrage from many voters, including some Trump supporters.

“Government budget cuts and layoffs are negatively impacting our operations,” a public administration service provider told the ISM. A firm from the transportation and warehousing industry said, “We are still holding back some money for emergency use in case the new administration targets grant usage and puts a hold on current spending.”

Of the four sub-indexes that directly factor into the services PMI, the business activity/production index: 55.9 in March (+1.5 points) vs. 54.4 in February; 58th consecutive growth, hitting a three-month high.

The new orders index: 50.4 (-1.8) vs. 52.2; the ninth straight expansion but at a nine-month low.

The employment index: 46.2 (-7.7) vs. 53.9; the first contraction in six months.

The supplier deliveries index (the only inversed subindex): 50.6 (-2.8) v. 53.4; slower for the fourth month in a row.

Among other subindexes, the prices paid index: 60.9 (-1.7) vs. 62.6; the fourth consecutive reading above 60. The new export orders index: 45.8 (-6.3) vs. 52.1; the lowest since 43.7 in March 2023.