–ISM Services Index at 53.5 in February Vs. 52.8 in January, Above Median Forecast 52.7
–ISM’s Miller: Services PMI Has Been Trending Down but More Stable Now, Points to Sustained Growth on Year
–Miller: Jump in ISM February Manufacturing Prices Paid Index Amid Higher Commodities Markets Not Yet Feeding Through to Services Prices
By Max Sato
The ISM index, which shows the directional change of economic activity, rose 0.7 percentage points to 53.5, above its 12-month moving average of 52.5, after slipping 1.2 points to 52.8 at the start of the year. It was firmer than the consensus forecast of 52.7.
“February was the third month in a row with all four subindexes that directly factor into the services PMI – business activity, new orders, employment and supplier Deliveries – in expansion territory, the first time this has happened since May 2022,” Steve Miller, chair of the ISM Services Business Survey Committee, said in a statement. “Slightly slower growth in the business activity index was more than offset by growth in the other three subindexes.”
At the same time, he warned about lingering concerns over the impact of the stiff 25% tariffs on imports from Canada and Mexico (10% for Canadian energy) that took into effect on Tuesday. President Donald Trump has doubled the import duties that he slapped last month on Chinese products to 20%
Miller noted that some respondents indicated that federal spending cuts are also having negative impacts on their business forecasts.
A construction company told the ISM that tariffs will have a significant cost impact to its projects. “The majority of the capital equipment we purchase is not manufactured in the U.S., or components that make the equipment come from overseas manufacturers,” it said. “We are also seeing U.S. prices already rise in anticipation, which is a similar reaction of the U.S. suppliers when the previous tariffs were introduced.”
“Business seemed to pop after the (presidential) election, but uncertainty after the election seemed to take the wind out of our sails, with uncertainty again increasing,” said a firm in the professional, scientific and technical services category.
Miller told reporters that “there were relatively few comments on tariffs that are actually going into price increases other than the ones that were implemented on China on metal products in February.”
“Other than that, it was really uncertainty,” he said. “The favorite word right now seems to be ‘chaos,’ so that was mentioned several times, and general commentary around uncertainty of business forecast and how badly that will impact both inbound costs and customer demand.”
He noted that the 7.5-point surge to 62.4 in the ISM manufacturing prices paid index seen earlier this week was due to higher commodities markets, and that it is not yet feeding through to the prices of materials and labor paid by the services sector.
Asked about the ISM services employment subindex’s solid 1.6-point rise to 53.9 in February, which is the highest in more than three years (since 54.6 in December 2021), Miller replied that it is “pretty balanced” as the number of industries that reported increases in February was the same as that of those showing decreases.
Miller said he was surprised by the ADP national employment report released Wednesday that showed an increase of 77,000 in private payrolls in February, well below the consensus of a 162,000 rise.
The 12-month moving averages in both the ISM’s overall PMI and employment subindex have been generally trending downward in recent months but Miller noted that the overall PMI reading is “more stable” now and points to “sustained growth year over year, which is a real positive sign.”
The latest 12-month “lookback” (backward) moving average in the ISM services PMI exceeded the prior 12-month moving average, Miller said. In February 2025, the 12-month moving average stood at 52.5, just above 52.4, which was the average between January 2023 and February 2024. The last time the most recent moving average was above the previous 12-month average was in July 2022, when the 12-month lookback average was 60.1, compared to 59.5, the average between August 2020 and July 2021.
Sal Guatieri, senior economist at BMO Capital Markets Economics, described the employment index as a “bright spot” in the ISM report. “Still, we are comfortable with our call for a modest further slowing in nonfarm payroll growth to 135,000 in February, due Friday, which could nudge the jobless rate higher.” The median economist forecast in a Mace News survey is a 160,000 increase.
“The Fed faces a tricky balancing act in the months ahead as the economy will likely lose momentum and inflation creep higher in response to new tariffs,” Guatieri wrote in a report. “The wisest option is to sit tight.” The Federal Open Market Committee is expected to pause in rate cuts at its March 18-19 meeting, holding the maintain the target range for the federal funds rate in a range of 4.25% to 4.50%.
Of the four sub-indexes that directly factor into the services PMI, the business activity/production index registered 54.4 in February, 0.1 percentage point lower than the 54.5 recorded in January but it is also the 57th consecutive month of expansion. The new orders index stood at 52.2, up 0.9 point from 51.3 in January. The index was in expansion for the eighth consecutive month after contracting in June for just the second time since May 2020.
The employment index was in growth territory for the fifth straight month, rising 1.6 points 53.9. Seven of the 14 industries, led by real estate, reported employment gains while the other 14 including retail saw drops.
The supplier deliveries index – the only ISM index that is inversed – edged up 0.4 point to 53.4, indicating slower supplier performance for the third month in a row. Comments from respondents include: “Due to weather events and staffing issues with distributors, some deliveries have been delayed” and “Noted delays were supply chain issues like surges in demand anticipating tariff impact.”
Among other subindexes, the prices paid index was at 62.6, up 2.2 points from 60.4 the previous month. The February reading is the 28th in a row below 70, though it is, for the first time since March 2023, a third consecutive month above 60.