–ISM Services Index Picks Up to 51.6 Vs. 50.8 in March, Above Consensus (50.2)
–Slight Pickup Led by 3 Out of 4 Key Subindexes: New Orders, Employment, Supplier Deliveries (Slower Deliveries)
–Employment Subindex in Contraction for 2 Months in a Row
–ISM’s Miller: More Industries Mention Trump Tariff Impact on Costs
–Miller: Must Watch for Profits, Survival of Smaller Firms That Lack Price Bargaining Power
By Max Sato
(MaceNews) – The U.S. services sector continued outperforming manufacturers in April, expanding for the 10th straight month, led by still solid new orders, but stiff import tariffs imposed by the Trump administration are jacking up costs for many firms and keeping the business outlook uncertain, data from the Institute for Supply Management showed Monday.
The ISM index, which shows the directional change of economic activity, only partially rebounded by 0.8 percentage point to 51.6 after slumping 2.7 points to a nine-month low of 50.8 in March from 53.5 in February. It was firmer than the consensus call of 50.2 but the index was below its 12-month moving average of 52.6, underperforming by that measure for the second month in a row.
The slight pickup was led by new orders, employment and supplier deliveries, three of the four subindexes that directly factor into the services sector purchasing managers’ index. Of the four, only the business activity index dipped on the month. Employment continues to be the only one of these subindexes in contraction territory, with two straight months of contraction.
“Regarding tariffs, respondents cited actual pricing impacts as concerns, more so than uncertainty and future pressures.” Steve Miller, chair of the ISM Services Business Survey Committee, said in a statement. “Respondents continue to mention federal agency budget cuts as a drag on business, but overall, results are improving.” Nine industries mentioned the tariff effects on prices that they pay in the April survey, up from seven in March, he said.
Looking ahead, Miller told reporters that smaller firms will be vulnerable amid the trade war as they lack price negotiating power.
“That’s one of the really big watchouts,” he said. “Even though we are not seeing that come through in the data yet, I think it’s a very reasonable observation (in comments by firms) on those that have market power versus those that don’t, and how that can give impact on their costs of operations, and in the case of thin margins, even their survival.”
The services sector as a whole, which accounts for roughly 30% of the U.S. gross domestic product, procured more in the past few months to raise inventories, which is allowing firms to hold off on making decisions or planning on supply management, Miller told reporters.
The 8.3-point slump to 44.3 in the imports subindex in April follows a 3.0-point jump to 52.6 in March, when firms front-loaded purchases to minimize the impact of rising U.S. import duties, he said.
The April survey of supply managers in the sector showed some “balanced comments” by those not yet directly hit by the Trump tariffs but those were a small portion compared to the commentaries on “tariff uncertainty and planning difficulties,” Miller said.
“Something that hasn’t hit the tariff radar are IT services,” he said, adding that an escalation in the global trade war initiated by the Trump administration could hurt trading in intellectual property among countries, which in turn “would have a larger impact on the services sector than some of the tariffs we are seeing on goods that are impacting, say, construction, retail, wholesale, warehousing and those types of industries.”
“We are seeing the tariffs hitting aluminum goods and finished electronics goods,” Miller said. “Even some of the comments from utilities were around two-year lead time items that have been ordered but haven’t been delivered yet, so they will be paying the tariffs on those products even though they weren’t considered in the original cost of goods. That will impact their capital planning for this year based on the additional cost.”
“However, there hasn’t been any activity around taxing software as a service, software developing activities and management services that are done by some overseas workforces,” he added.
On the supply delivery front, Miller noted that the services sector is not experiencing the same type of strains on customs-clearance of containers out of ports and indications of transportation disruption around the ports that were reported by his ISM manufacturing counterpart Tim Fiore last week.
Some Canadians are being cautious about visiting south of the border for fear of being detained by immigration officials for no particular reason, as news reports warn, or bypassing U.S. cities as holiday destinations as part of their protest against President Trump who is challenging the sovereignty of Canada, calling it a 51st state.
But Miller said the ISM data hasn’t shown any impact on the tourism industry, stressing the accommodation and food services category was the strongest growth leader in the April report.
Among the four sub-indexes that directly factor into the services PMI, the business activity/production index: 53.7 in April vs. 55.9 (was a three-month high) in March; 59th consecutive growth.
The new orders index: 52.3 vs. 50.4; the 10th straight expansion, picked up to a four-month high from a nine-month low the previous month.
The employment index: 49.0 vs. 46.2 (the first contraction in six months). Comments from respondents are mixed: “Modest gain due to backfilling many empty positions” and “Hiring freeze due to uncertainty of government grants.”
The supplier deliveries index (the only inversed subindex): 51.3 vs. 50.6; slower for the fifth month in a row.
Among other subindexes, the prices paid index: 65.1 vs.60.9; the fifth consecutive reading above 60 but the 30th in a row below 70. It is the index’s highest since January 2023 (65.8). Seventeen of the 18 services industries reported an increase in prices paid during the month of April, led by wholesale trade, mining, construction, other service, information as well as the real estate, rental and leasing category.
The inventories index: 53.4 vs. 50.3;in expansion territory for the third month in a row. “This continued expansion seems to be the result of tariff contingency planning,” Miller told reporters. Comments from respondents include: “Purchased some products in advance of tariffs” and “Increased sales volumes show the need to increase inventory levels.”
The new export orders index: 48.6 vs. 45.8 (the lowest three years since 43.7 in March 2023). The index rose 2.3 points after a 6.3% plunge from February’s 52.1, which was a five-month high. The three industries reporting an increase in new export orders in April are: accommodation and food services; information; and finance and insurance. The plunge in March reflected boycotts of American products and services by Canadian consumers and their federal, provincial and municipal governments.
The imports index: 44.3 vs. 52.6; the lowest since 44.0 in June 2024. This indicates “shifts to domestic suppliers” and a “wait-and-see” approach to decision-making on supply chains, according to Miller.