By Max Sato
(MaceNews) – The U.S. services sector posted a 19th straight month of expansion in January on general optimism that things will turn around in 2026 in the aftermath of Trump tariff storms but the pace of activity was flat on the month as data center expansion is causing capacity concerns and rising costs for labor and copper are keeping inflationary pressures high.
The purchasing managers index for services compiled by the Institute for Supply Management came in as expected at 53.8, unchanged from December, when the index rose 1.4 percentage points to 53.8 (revised down from 54.4), official data released Wednesday showed.
The ISM conducted its annual update on seasonal adjustments dating to January 2023, but it did not change the bigger picture: Business activity is the highest since October 2024, employment is showing signs of a modest pickup and supplier deliveries remain the slowest since October 2024, when powerful hurricanes choked supply chains.
All of the four sub-indexes that directly factor into the services PMI were in expansion territory for the second month in a row, although new orders continue to fluctuate from month to month (December figures in parentheses):
Business activity 57.4 (55.2) +2.2, the highest since 57.7 in October 2024
New orders 53.1 (56.5) -3.4, the sixth drop in 12 months
Employment 50.3 (51.7) -1.4, the fourth expansion in 12 months
Supplier deliveries 54.2 (51.8) +2.4, the slowest since 56.4 in October 2024 (above 50 means slower deliveries)
Among other sub-indexes:
Prices 66.6 (65.1) +1.5, above 60 for 14 months in a row
Backlog orders 44.0 (42.6) +1.4, in contraction for 11 months in a row
New export orders 45.0 (54.2) -9.2, the lowest since 43.7 in March 2023, when the European economy was slow
“December 2024 and January 2025 featured similar subindex performance, but in the last two months, the PMI is stronger year over year by an average of 0.7 percentage point,” the ISM said, adding that the employment sub-index expanded for a second straight month for the first time since January and February 2025.
But the ISM warned that prices sub-index continues to creep up, now 0.2 percentage point above its 12-month seasonally adjusted average of 66.4. “There was more respondent commentary in January on tariff impacts and uncertainty, potentially the result of annual contract renewals and geopolitical tensions.”
ISM Services Business Survey Committee Chair Steve Miller told reporters that the services sector continues to show “the pattern of new orders dropping while backlogs of orders are increasing in the same month.”
Asked about whether lingering upward price pressures are coming from extra costs from U.S. tariffs imposed on imports from many countries, Miller said they seem to be coming from higher labor costs as they were a factor behind higher prices for the sixth month in a row.
Rising copper prices are also contributing to elevated overall business costs, he said, in light of supply disruptions, the outlook for strong Chinese demand and expected high requirements from the information technology industry.
“Unsettling to see the month-over-month increase and also unsettling to see consistent numbers in the 60 range, but at least it doesn’t look like it’s escalating,” he said. “So, from my perspective, the tariff impacts, I think, are being absorbed in the supply chain.”
The prices sub-index has stayed above a key level of 60 since December 2024 and its 12-month trendline has risen to 68 from 65 but it has dipped 0.2 point since April 2025, when stiff trump tariffs took effect, he explained.
Other remarks by Miller during the briefing:
-The export index’s slump appears to have been triggered by negative perspectives from foreign buyers amid trade rows, similar to what was found in the ISM manufacturing report for January amid geopolitical risks.
–A future interest rate cut should help increase lending and support economic activity but the Federal Reserve is stuck between a rock and a hard place amid price pressures.
–Miller has ‘no perspective’ when asked if the U.S. political polarization and controversies over the crackdown by the Immigration and Customs Enforcement are capping services sector recovery.
–On the ICE controversies, consumer confidence is down and buying behavior has been reduced in food services.
The artificial intelligence boom has lifted stock markets but it is also causing widespread concerns.
“Supply of chips [is] nowhere near keeping up with demand due to data center buildouts taking all available OEM (original equipment manufacturer) inventory,” the ISM quoted a firm, without specifying to which industry it belongs.
“Data centers are causing large spikes in requirements,” a utility provider told the ISM. “Suppliers are challenged by capacity and tariffs. Therefore, this is both an exciting and challenging time in the industry.”
A firm in the health care and social assistance category said, “AI data center construction is expected to cause constraints in the IT market and availability. We haven’t seen delays on IT equipment yet but expect them in the coming months.”