ISM Services Stronger than Expected with Hot Prices

The price component of ISM services was over 60 for the third month.

ISM is a diffusion index with numbers above 50 indicating expansion and below 50 contraction.

A weakness of diffusion indexes is direction matters more than amount. For example, a business hiring 2 people would offset a business firing 300.

Please consider the February 2025 Services ISM^® Report On Business^® emphasis mine.

Economic activity in the services sector expanded for the eighth consecutive month in February, say the nation’s purchasing and supply executives in the latest Services ISM^® Report On Business^®. The Services PMI^® registered 53.5 percent, indicating expansion for the 54th time in 57 months since recovery from the coronavirus pandemic-induced recession began in June 2020.

The report was issued today by Steve Miller, CPSM, CSCP, Chair of the Institute for Supply Management^® (ISM^®) Services Business Survey Committee: “In February, the Services PMI^® registered 53.5 percent, 0.7 percentage point higher than the January figure of 52.8 percent. The Business Activity Index registered 54.4 percent in February, 0.1 percentage point lower than the 54.5 percent recorded in January. This is the index’s 57th consecutive month of expansion. The New Orders Index recorded a reading of 52.2 percent in February, 0.9 percentage point higher than the January figure of 51.3 percent. The Employment Index remained in expansion territory for the fifth consecutive month; the reading of 53.9 percent is a 1.6-percentage point increase compared to the 52.3 percent recorded in January.

“The Supplier Deliveries Index registered 53.4 percent, 0.4 percentage point higher than the 53 percent recorded in January. This is the third consecutive month the index has been in expansion territory, indicating slower supplier delivery performance. (Supplier Deliveries is the only ISM^® Report On Business^® index that is inversed; a reading of above 50 percent indicates slower deliveries, which is typical as the economy improves and customer demand increases.)

“The Prices Index registered 62.6 percent in February, a 2.2-percentage point increase from January’s reading of 60.4 percent. The index registered a third consecutive reading above 60 percent for the first time since March 2023. The Inventories Index returned to expansion territory in February, registering 50.6 percent, an increase of 3.1 percentage points from January’s figure of 47.5 percent. The Inventory Sentiment Index expanded for the 22nd consecutive month, registering 54.7 percent, up 1.2 percentage points from January’s reading of 53.5 percent. The Backlog of Orders Index registered 51.7 percent in February, a 6.9-percentage point increase from the January figure of 44.8 percent, entering expansion territory for the first time since July 2024 with its highest reading since July 2023 (52.1 percent).

“Fourteen industries reported growth in February, equaling the previous month’s total. The Services PMI^® has expanded in 54 of the last 57 months dating back to June 2020. The February reading of 53.5 percent not only exceeds the January reading of 52.8 percent, but is also a full percentage point above the average PMI^® reading of 52.5 for the last 12 months.”

Miller continues, “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. Slightly slower growth in the Business Activity Index was more than offset by growth in the other three subindexes. Anxiety continues; however, over the potential impact of tariffs. Some respondents indicated that federal spending cuts are having negative impacts on their business forecasts.”

Respondent Comments

• “Tariff actions have created chaos in information and pricing measures, forecasting and forward buys, which may artificially inflate purchases to be followed by a drop off.” [Accommodation & Food Services]
• “There is great uncertainty about future business activity due to the risk of tariffs and other potential government actions.” [Agriculture, Forestry, Fishing & Hunting]
• “Implementation of tariffs will have a significant cost impact to our 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. 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.” [Construction]
• “The university is still digesting the current potential changes with federal assistance programs.” [Educational Services]
• “The last month has brought multiple weather events. Some locations were closed or delayed opening. Norovirus and other viruses have resulted in busy emergency departments and urgent care facilities.” [Health Care & Social Assistance]
• “Tariffs are going to have a ripple down effect that could severely harm our business.” [Information]
• “Concern regarding tariffs. No impact yet.” [Management of Companies & Support Services]
• “Business seemed to pop after the election, but uncertainty after the election seemed to take the ‘wind out of our sales,’ with uncertainty again increasing.” [Professional, Scientific & Technical Services]
• “Observed some contracting uncertainty earlier in the month relating to federal funding freeze, but operations have largely normalized as of today.” [Public Administration]
• “Weather has been terrible. When it is not cold and snowy, it seems to be raining. I think that is the biggest hurdle at the moment. The tariff situation has created some uncertainty in the lumber market, but without demand the price of lumber should not move very much. Affordability and high interest rates are still headwinds, but sentiment seems to be good.” [Wholesale Trade]

There were 8 comments regarding tariffs with one industry [Management of Companies & Support Services] saying “no impact yet”.

Prices, up 93 straight months and accelerating, are an obvious concern.

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For Manufacturing ISM, prices were up only 5 months but took a big jump from 54.9 to 64.2.

This is tariff related.