By Max Sato
(MaceNews) – The U.S. services sector revved up sharply in February to extend its expansionary phase into a 20th month as firms have managed to absorb higher costs triggered by stiff import duties imposed under the protectionist U.S. trade policy, indicating a resilient labor market and solid economic growth in the first quarter.
The purchasing managers index for services compiled by the Institute for Supply Management jumped 2.3 percentage points to 56.1, the highest since July 2022 (56.5), after being flat at 53.8 in January and rising 1.4 points December. The February level indicates a 2.5-point increase in total domestic output at an annualized pace, the ISM said.
“The services sector is heating up, with the business activity, new orders, and new export orders indexes at their highest levels since 2024, and the backlog of orders index with its best reading since July 2022,” ISM Services Business Survey Committee Chair Steve Miller said in a statement.
Many firms told the ISM that tariffs impacts have stabilized and are now embedded in supply chain costs, Miller said. “Although there were several comments on tariff uncertainty regarding the U.S. Supreme Court decision, there was no alarm regarding supply chain performance, suggesting that services companies have developed capabilities to routinely address shifts in tariff policies,” he concluded.
Miller told reporters that supply managers should be able to deal with more uncertainties raised by President Trump’s decision to slap new tariffs to replace the existing ones that have been ruled by the Supreme Court to be unlawful, as long as the Congress approves extreme measures like completely cutting off trade with some countries.
Higher import costs particularly hurt the retail, transport/warehousing and whole trade but the overall drag from the tariffs on the services sector is “relatively modest” compared to that on the manufacturing sector, he said.
All of the four sub-indexes that directly factor into the services PMI were in expansion territory for the third month in a row (January figures in parentheses) and all 10 sub-indexes showed expansion for the first time since March 2021.
Business activity 59.9 (57.4) +2.5, the highest since 59.9 in May 2024
New orders 58.6 (53.1) +5.5, the highest since 59.1 in September 2024
Employment 51.8 (50.3) +1.5, the third straight expansion; the highest since 53.9 in February 2025
Supplier deliveries 53.9 (54.2) -0.3, January’s 54.2 was the slowest since 56.4 in October 2024 (above 50 means slower deliveries)
Among other sub-indexes:
Prices 63.0 (66.6) -3.6, the lowest since 60.9 in March 2025 but remains elevated, above 60 for 15 months in a row
Backlog orders 55.9 (44.0) +11.9, the first expansion in 12 months (51.7 in February 2025)
New export orders 57.2 (45.0) +12.2, the highest since 58.5 in July 2024, thanks to the recent depreciation of the dollar, following a 9.2-piont slump in January to the lowest since 43.7 in March 2023, when the European economy was slow.
Asked about a sharp drop in the subindex showing prices paid by services providers in February when the similar prices subindex for the manufacturing sector jumped, Miller replied, “What looks to be the ability of the services sector to keep up with demand … is not driving significant increases in prices.” Backlog orders have been low over the last 12 months while supply deliveries have been “pretty solid around the 50s” except for a sharp slowdown in November 2025 and January 2026, he said.
Looking ahead, Miller said he will watch out for additional cost increases spilling over from the manufacturing sector, such as the prices for high voltage equipment (transformers, circuit breakers, cables, etc.) that is not showing the effects of the U.S. tariffs.
Among cost-released comments from ISM members, a mining firm said, “The combination of tariff exposure and semiconductor market instability is increasing procurement risk, compressing margins, and requiring more aggressive supplier diversification and contractual protections to maintain cost competitiveness.” A retailer said, “Due to random-access memory shortages, we are seeing increased cost and lead times from key technology providers. Quotes that were normally secure for 90 days are now 30 days or less.”
Miller said he is “generally optimistic” about the impact of the Iran war as long as it doesn’t become a “huge” destabilizing factor for supply managers. He does not expect containership chartering rates to double, as seen during the pandemic-caused global supply chain breakdown, but predicted that the Middle East conflict could push up the costs of ocean shipping by 20% to 30%.
On the economic impact of the heightened Middle East conflict after the U.S.-Israeli attacks on Iranian cities and Tehran’s retaliation in the Gulf, Miller said foreign tourism is expected to plunge, hurting the hospitality industry that includes food services, arts and entertainment and airlines. Utilities and wholesalers supporting construction firms overseas will be hit while customers may put large-scale information technology projects on hold in the face of higher global uncertainties, he added.
On the other hand, cyber security service providers are expected to benefit from the conflict while wholesalers serving the aerospace and defense industries are “already seeing a positive impact” and their business could expand further, Miller noted.