ISM report points to services sector growth in March but at a reduced rate

Growth in the services sector remained intact in March, for the ninth consecutive month, according to the new edition of the Services ISM Report on Business, which was released today by the Institute for Supply Management (ISM).

The March Services PMI, at 50.8 (a reading of 50 or higher signals growth) fell 2.7% compared to February, growing, at a slower rate, for the ninth consecutive month, and for the 55^th time in the last 58 months, going back to the initial recovery from the pandemic in June 2020.

The March Services PMI was 1.6% below the 12-month average of 52.4, with October 2024’s 55.8 and June 2024’s 49.2 marking the respective high and low readings over that period. The March reading represents the lowest one going back to June 2024.

ISM reported that 10 of the services sectors it tracks saw growth in March (down from 14 in each of the last two months), including: Accommodation & Food Services; Transportation & Warehousing; Finance & Insurance; Wholesale Trade; Public Administration; Utilities; Agriculture, Forestry, Fishing & Hunting; Construction; Real Estate, Rental & Leasing; and Retail Trade. The sectors seeing contraction included: Management of Companies & Support Services; Professional, Scientific & Technical Services; Other Services; Arts, Entertainment & Recreation; Educational Services; Health Care & Social Assistance; and Information.

The report’s subindexes that factor into the NMI largely were down February to March, including:

• Business Activity/Production: at 55.9, up 1.5% from February, growing, at a faster rate, for the 58^th consecutive month, with 12 sectors reporting an increase in business activity;
• New Orders, at 50.4, fell 1.8%. growing, at a slower rate, for the ninth consecutive month, following a contraction in June (49.6), which was the first monthly contraction since May 2020, with nine sectors reporting an increase in new orders;
• Employment, at 46.2, was off 7.7%, contracting after five months of growth, with four sectors reporting an increase; and
• Supplier Deliveries, at 50.6 4 (a reading above 50 indicates slower deliveries), slowing, at a slower rate, for the fourth consecutive month, with six sectors reporting slower deliveries

Comments from ISM member panelists included in the report highlighted various trends in the services sector, with tariffs again receiving a fair amount of attention.

An Information services panelist said that the tariffs have caused issues in the groundwood paper market especially.

“With a large amount of groundwood imported from Canada to the U.S., the tariffs and resulting delays have caused havoc with the supply chain and deliveries,” the panelist explained. “U.S. mills are getting backlogged and late from the additional tonnage they've taken on.”

A Transportation & Warehousing respondent said that his company is holding back some money for emergency use in case the new administration targets grant usage and puts a hold on current spending.

In an interview, Steve Miller, Chair of the ISM Services Business Survey Committee, observed that the March Employment and New Export Order numbers [down 6.3% to 45.8] jump out as what he called natural consequences related to tariff uncertainty, as it relates to the services sector.

“From a services standpoint, labor is often the top line item on the operating expense side for a company,” he said. “And some of the reciprocal activity, or call it lack of alignment between buyer and seller as to who is going to pay the tariffs if you are delivering overseas has had a very expected impact on New Export Orders. Both of these are going to be the ones to watch most closely over the next couple of months and have the probability of taking the PMI down below 50.”

In the near-term, Miller said it is reasonable to expect a minimum of two months of uncertainty within the services sector, with the rationale for that being that the tariffs announced yesterday can be viewed as a negotiating tactic or a permanent measure.

When asked if yesterday’s tariff announcement negatively impacts future forecasting for the services sector, Miller said that it does—with the caveat that to what extent is unclear. One reason for that, he explained, is that as imports become more expensive, it is unclear what will happen to domestic pricing. Another potentially negative outcome, he noted, which could impact services, especially construction, is that this situation reduces the likelihood of the Federal Reserve reducing interest rates, with the reason being that were that to occur, it would immediately lead to inflation.

The most positive takeaway of the March report, according to Miller, is the Business Activity reading, which was seen in panelist comments, in the form of things like new projects, seasonal sales and traffic trends, which required additional staffing, business expansion and more confidence at the beginning of the fiscal year, and positive commentary related to business activity, in general. He likened the current environment to that of an aircraft carrier kind of momentum.

“We have some heavy winds, and I don’t know how much is going to steer it,” he said. “But it seems like there is enough momentum here to stay positive. It is really all about, from a risk mitigation standpoint on financial performance, how heavy CFOs are going to be pulling levers on labor and external spending.”

SC
MR