March 5, 2025

The Institute for Supply Management not only publishes an index of manufacturing activity each month, they publish two days later a survey of service sector firms.  The business activity index declined 0.1 point in February to 54.4 after having fallen 3.5 points in January.  We tend to focus on the business activity component as a measure of “production” because it seems to track better with the pace of economic activity.  It has been bouncy in recent months but still shows solid growth in the service sector despite Trumps imposition of tariffs, the early stages of federal government layoffs, and deportation of immigrants.

The composite index rose 0.7 point in February to 53.5 after having declined 1.2 points in January.   According to Steve Miller, Chair of the Institute for Supply Management’s Business Survey Committee, ““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.”

At its current level the ISM group says that is consistent with 1.6% growth in GDP.  After climbing 2.3% in the fourth quarter we expect to see 2.8% GDP growth in 2025.

Comments from respondents include:

• “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]
• ponent since June 2024.  Comments from respondents include:  “Bid level is the highest level in over five years” and “High interest rates and inflation.”

The orders component rose 0.9 point in February to 52.2 after having declined 3.1 points in January.  this index has risen for p8 months since declining in June of last year.  Comments from respondents include: “Business expansion” and “Trying to get ahead of the Canadian tariffs.”

The ISM non-manufacturing index for employment rose1.6 points in February to 53.9 after having gained 1.0 point in January.   This is the fifth month in a row that employment in the service sector rose.  Seven industries reported an increase in employment in February   Comments from respondents include  “Pre-planned increase in staff to accommodate higher revenue/fundraising” and “Delays in hiring as a result of U.S. government actions/executive orders; employees on furlough.”

The suppler deliveries component rose 0.4 point  in February to 53.4 after having climbed 0.5 point in January.  This component is reversed in the sense that a reading above 50 percent indicates slower deliveries to service sector firms, while a reading below 50 percent indicates faster deliveries. Thus, firms reported slower delivery times in February for the third month in a row.   Comments from respondents include: “Due to weather events and staffing issues with distributors, some deliveries have been delayed” and “Noted delays were supply chain issues like surges in demand anticipating tariff impact.”

Finally, the price component rose 2.2 points in February to 62.6 after  having fallen 4.0 points in January.  It turns out that the December, January, and February readings are the first three months above 60 since March 2023.   Sixteen of 18 service sector industries reported an increase in prices paid during the month.

The manufacturing sector of the economy contracted every month from November 2022 until January 2025.  The service sector continues to expand at a respectable pace.  We saw GDP growth of 2.3% in the fourth quarter and we anticipate 2.8% GDP growth in 2025.

.Stephen Slifer

NumberNomics

Charleston, SC