–ISM’s Miller: ‘Not Seeing Weakness in Services Sector’; Employment Subindex Slump ‘One-Month Blip’
By Max Sato
(MaceNews) – U.S. services sector expansion slowed but maintained underlying strength in March, led by another strong gain in new orders, but firms were also hit by a rapid and widespread spike in energy and commodities prices, particularly fuel and transportation costs, amid the Middle East conflict.
The purchasing managers index for services compiled by the Institute for Supply Management, which shows direction not the level of activity, slipped back 2.1 percentage points to 54.0 after jumping 2.3 points to a more than three-year high of 56.1 the previous month. The March reading is still the highest since 55.5 in October 2024.
The overall index is still 1.7 points above its 12-month moving average and stayed above the average for the sixth month in a row.
“I don’t think we are seeing weakness in the services sector at all,” ISM Services Business Survey Committee Chair Steve Miller told a briefing, downplaying the plunge in the employment subindex in March as a “one-month blip.”
“Overall, we are seeing economic strength,” he said. “Nine of the 10 subindexes are still in expansion territory.”
The services sector is now in expansion for 21 months in a row while manufacturing activity expanded for the third straight month in March, gradually emerging from the tariff-triggered doldrums of 2025.
“The prices index increased, as expected, amid higher oil and fuel costs, and the supplier deliveries index indicated slower performance compared to February, also unsurprisingly with shipping issues and flight disruptions due to the Middle East conflict and winter weather,” Miller said in a statement. “Continuing strength in business activity, new orders and backlog of orders are positive economic signals, so the employment index dropping to its lowest level since December 2023 (43.5) was a surprise.”
There are other signs of economic strength. Exports and imports have expanded for two months in a row for the first time since September and October 2024, he added.
The “majority” of the prices index surging to a more than three-year high in March came from the direct impact of the Mideast war that triggered a spike in oil and gas prices, Miller told reporters, although there is still upward pressure on the prices of steel and aluminum (their import duties remain high) and new pressure on lumber and wood.
There is an “inventory buildup” among service providers in February and March to withstand supply chain disruptions or short-term oil price impacts, similar to the move seen from February to April last year just before the Trump tariffs kicked in, although companies are “comfortable” with the levels of their inventories, Miller said.
Other comments by Miller at the briefing:
– The ISM employment sub-index tends to lead two to four months ahead of the official monthly employment data released by the Bureau of Labor Statistics; seeing a short-term shock from reduced travel, tourisms or more cautious behavior (“fear of the unknown”).
– The services sector is mainly hit by a spike in transportation costs (surcharges are stipulated in agreements); there are fewer concerns expressed about a future, potential rise in other costs.
– The March report showed an “extreme focus” on the Mideast-triggered energy cost spike; it might have led firms to artificially comment less on the lingering tariff impacts.
– Only a small number of survey respondents commented on the effects of the tariffs in March, “much, much smaller” than three to four months ago.
– If companies were seeing a 10% to 20% rise in costs, they could delay passing onto customers as with the initial phase of tariffs, but they are seeing a much higher increase.
– The cost spike is so immediate and widespread that “I’m expecting a follow-through”; if firms see a 50% rise in costs, they will have to pass it along.
Last month, Miller told reporters that tariff impacts had stabilized and were now embedded in supply chain costs, noting that comments by ISM member firms indicated that “services companies have developed capabilities to routinely address shifts in tariff policies.” The overall drag from the tariffs on the services sector is “relatively modest” compared to that on the manufacturing sector.
“The war in Iran has added an additional layer of uncertainty on top of an already shaky macroeconomic climate,” a firm from the real estate, rental and leasing industry told the ISM in the March report. “A spike in inflation due to higher oil prices will reduce purchasing power, affecting every industry.”
A company from the transportation and warehousing category pointed to the rapid natures of the latest price hikes: “Recent increases in fuel prices are having a substantial impact on the airline industry, resulting in significantly higher operational costs compared to pricing from just one month ago.”
Three of the four sub-indexes that directly factor into the services PMI were in expansion territory (February figures in parentheses). Nine of the 10 sub-indexes showed expansion.
Business activity 53.9 (59.9) -6.0, the lowest since 49.9 in September 2025 after hitting the highest since May 2024 (also 59.9) in February.
New orders 60.6 (58.6) +2.0, the highest since 61.6 in February 2023, follows a 5.5-point gain in February.
Employment 45.2 (51.8) -6.6, the lowest since 43.7 in December 2023; the last contraction was seen in a six-month period to November 2025.
Supplier deliveries 56.2 (53.9) +2.3, the slowest since 56.4 in October 2024, as in January (54.2) was the slowest since 56.4 in October 2024 (above 50 means slower deliveries)
Among other sub-indexes:
Prices 70.7 (63.0) +7.7, the highest since 70.7 in October 2022 after hitting the lowest since March 2025 (60.9) in February; above 60 for 16 months in a row
Backlog orders 53.6 (55.9) -2.3, the February reading was the first expansion in 12 months.