Services economy growth remained solid in February, according to the new edition of the Services ISM Report on Business, which was released today by the Institute for Supply Management (ISM).
The February Services PMI, at 56.1(a reading above 50 represents expansion and below 50 indicates contraction), was up 2.3% over January, growing, at a faster rate, for the 20th consecutive month—turning in its highest reading since July 2022’s 56.5. ISM added that the overall economy grew, at a faster rate, for the 69th consecutive month in February.
The February Services PMI reading is 4.1% above the 52.0 12-month average, with February marking the highest reading for that period and May 2025’s 50.2 marking the lowest.
ISM reported that 14 of the services sectors it tracks saw growth in February, including: Mining; Information; Real Estate, Rental & Leasing; Agriculture, Forestry, Fishing & Hunting; Accommodation & Food Services; Wholesale Trade; Finance & Insurance; Utilities; Professional, Scientific & Technical Services; Construction; Management of Companies & Support Services; Public Administration; Health Care & Social Assistance; and Educational Services. Sectors seeing contraction included: Retail Trade; Arts, Entertainment & Recreation; and Transportation & Warehousing.
The report’s subindexes that factor into the PMI largely saw gains, including:
- Business Activity/Production, at 59.9, growing, at a faster rate, for the 20th consecutive month, for its second-highest since hitting 62.7 in November 2022, trailing only the 60.5 May 2024 reading, with 13 sectors seeing gains;
- New Orders, at 58.6, rose 5.5%, growing, at a faster rate, for the ninth consecutive month (and expanding in 36 of the last 38, months), with 15 sectors reporting increases in new orders;
- Employment, at 51.8, was up 1.5%, growing, at a faster rate, for the third consecutive month, with seven sectors reporting employment growth; and
- Supplier Deliveries, at 53.9 2 (a reading above 50 indicates slower deliveries), off 0.3%, slowing, at a slower rate, for the 15th consecutive month, with nine sectors reporting slower deliveries
Comments from ISM member panelists included in the report highlighted various trends in the services sector, with tariffs and business conditions again receiving a fair amount of attention.
“Residential homebuilding continues to lag due to affordability and interest rate issues,” said a Construction sector panelist. “While we saw improved sales last month due to further discounts, we struggled to achieve similar results in February. More material cost increases have rolled in for beginning of the second quarter, so margins continue to be reduced.”
And a Transportation & Warehousing sector panelist said that transportation/truck capacity has been extremely tight, causing rates to spike 30 percent to 40 percent.
“Some of this can be attributed to the weather; some can be attributed to the Federal Highway Administration’s push to make sure all drivers are proficient in English and others can be attributed to an increase in commerce,” the panelist said.
In an interview with LM, Steve Miller, Chair of the ISM Services Business Survey Committee, attributed February’s strong performance to continued strength in business activity, new orders, new export orders (up 12.2%, to 57.2), and moderation in prices paid.
The gain 11.3% gain in inventories also stood out, according to Mille, with the timing of the Asian Lunar New Year helping to drive that increase.
“We are also seeing some sustained change in trend in recent months for business activity and other readings, too,” he said. “Over the last six months, eight of the 10 indices in the report are on a positive trend, with the only two not on that trend are inventory sentiment and prices paid. There is still inflation but at least the reading is not in the high 70s or low 80s like it was during higher inflationary periods.”
Addressing the joint United States-Israel attack on Iran, in terms of how it could impact the services sector, Miller explained that the moderation seen for gasoline and oil prices is likely to stop, coupled with Transportation & Warehouses contracting in February.
Transportation includes airlines, and [the Iran conflict] is going to impact both the tourism, as well as restriction in trade routes and it going to affect that sector pretty significantly, both from a cost and from a cost of operations perspective overall,” he said. “For customers using ocean freight, those costs are going to go up. My guess is 30%-to-50% increase, at least short-term, on Container rates. Typically, now is a time where you see very cheap container rates. I think that that’s going to be a problem, because they’re going to have to hold containers longer, because a lot of the shipping is going to have longer routes, requiring more equipment and making those, those loads less available.”
Miller said he expects the first quarter Services PMI to end up around 55, pointing to likely slower supplier deliveries, lower new orders, while business activity is expected to remain elevated.
“It could end up between 54-to-56,” he said. “Further into the year, it will depend on how long the trade impact continues around the conflict. For the U.S. economy, it really depends on petroleum and what happens there. “It is such a core piece for what you pay to keep your buildings heated or cooled. Also, in terms of IT, information of one of our most significant sectors, and utilities is another, with the cost of operations for utilities expected to go up. Consumer costs could rise, leaving less money to spend on services. If it goes on for a while, we could be in contraction by the end of the second quarter. We just need to see how things play out.”
