EconoFACTS

March 05, 2025 | 10:34

U.S. ISM Services: Better But Not Tariff-ic

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

The U.S. services sector bounced back modestly in February after a stormy January, but tariff concerns are starting to hold it back. The ISM services index rose to 53.5, a little more than expected, indicating a moderate expansion for an eighth straight month. This likely reflects some rebound in consumer spending after a chilly January and the LA wildfires. However, the index has tracked sideways in the past half year, indicating little momentum. The respondents' comments suggest that concern about a trade war is not just limited to the goods-producing sectors. One such remark noted: “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.”

One bright spot in the report is that the employment sub-index picked up (to 53.9), countering recent news of a weak ADP jobs print (77,000). 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.

Unfortunately, the report also contained some bearish inflation news. Vendor delivery times slowed for a third straight month and prices paid for materials and labour rose further (to 62.6), holding above the 60 level for a third month in a row. This means supply chains and inflation were already under pressure before new tariffs began in earnest (apart from imports from China facing an increased 10% levy on February 4).

Upshot: 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. The wisest option is to sit tight.

Table 1 - United States — ISM Services PMI

(percent reporting)

Source: BMO Economics, Haver Analytics