US service sector growth picks up in February on strong demand, job growth

By Vince Golle

 

US service providers expanded in February at a faster pace as resilient demand helped drive a measure of employment to a more than three-year high. 

The Institute for Supply Management’s gauge of services advanced to 53.5 from 52.8 a month earlier, according to data released Wednesday. Readings above 50 signal growth, and the latest figure exceeded economists’ expectations.

 

The group’s index of services employment climbed for a third month to 53.9, the highest since December 2021. Separate figures out earlier showed the smallest advance in private-sector payrolls last month since July, with job cuts in the services sector and regions impacted by harsh winter weather.

 

A measure of costs paid for materials and services increased to one of the firmest readings since early 2023, underscoring the challenge Federal Reserve policymakers face as they look to further tamp down inflationary pressures. 

While the ISM survey suggests service providers are signaling steady business activity, recent monthly data from the government indicate the economy was off to a rough start at the turn of the year. The Atlanta Fed’s GDPNow forecast currently projects gross domestic product will decline in the first quarter.

 

A spike in imports accounts for a large share of the setback, reflecting a scramble by companies to secure goods from overseas ahead of tariffs from the Trump administration. Business investment, consumer spending and homebuilding were also notably weak in January.

 

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

 

Fourteen industries, including finance and insurance, wholesale trade and utilities, reported growth in February. Three industries contracted.

 

The biggest concern expressed about tariffs was business uncertainty and the inability to get long-term agreements in place, and “the favorite word seems to be chaos,” Miller said on a call with reporters.

 

“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

 

“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 US, or components that make the equipment come from overseas manufacturers. We are also seeing US prices already rise in anticipation.” — Construction

 

“Tariffs are going to have a ripple down effect that could severely harm our business.” — Information

 

“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

 

“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

 

The ISM survey showed orders growth accelerated in February, while another gauge showed order backlogs expanded by the most since July 2023. Further, the index of business activity, which parallels the group’s factory output gauge, remained elevated.

 

Those developments help explain the stronger ISM employment gauge. While the figures don’t detail the degree of employment growth during the month, the index may provide some reassurance that the government’s jobs report later this week will show a resilient labor market.