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Report On Business® Roundup: February Services PMI®

March 05, 2025
By Dan Zeiger

In the more than four years since the recovery from the coronavirus pandemic, the strength and resiliency of the U.S. services sector — through economic uncertainty, trade turbulence and a lengthy manufacturing recession — has been cited regularly.

On the likely brink of yet another test, the Services ISM® Report On Business® data for February revealed more of the sector’s collective grit. The Services PMI® registered 53.5 percent on Wednesday, exceeding analysts’ projections as businesses brace for the impact of tariffs and drastic cuts of budgets and workforces at federal agencies.

The composite index reading in February is 1 percentage point above the 12-month rolling average, and all four subindexes that directly factor into the PMI® — Business Activity, New Orders, Employment and Supplier Deliveries — were in expansion territory, the first time that has happened since May 2022.

If the word of the month among survey respondents was “chaos,” as Steve Miller, CPSM, CSCP, Chair of the Institute for Supply Management® (ISM®) Services Business Survey Committee, pointed out to a conference call of reporters, the sector withstood it handsomely. Current conditions are not a red flag, he said, but a yellow flag.

“Despite the uncertainty of business forecasts and how (tariffs) will impact input costs and customer demand,” Miller said, “we’re still seeing expansion. … The fact that we’re seeing what I would call stable and more sustained growth year over year is a positive sign.”

Like in ISM’s Manufacturing report earlier this week, the most cited concern among Services panelists was the potential impacts of tariffs. On Tuesday, the Trump administration announced previously paused 25-percent tariffs on products from Canada and Mexico would go into effect, as well as additional 10-percent levies on Chinese imports. That the administration was reportedly prepared to backtrack on some of the levies on Wednesday added to the anxiety.

Wrote a Services Business Survey panelist in Construction, “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.”

The Prices Index did not have a big spike like in the Manufacturing report, but it was up 2.2 percentage points to 62.6 percent. While that’s lower than the December reading of 64.4 percent and miles below the 10 straight figures in excess of 80 percent in 2021 and ’22, it is the third in a row above 60 percent. The last time that occurred was in March 2023.

Much panelist frustration was not about higher prices, Miller noted, but “about business uncertainty and inability to get long-term agreements in place that that don’t have tariff considerations built into them,” he said.

While tariffs typically have a greater impact in the manufacturing sector, efforts by the Department of Government Efficiency (DOGE) to slash funding and head counts at such federal agencies as the U.S. Agency for International Development, National Institutes of Health and Department of Veterans Affairs would be felt acutely in services, where Public Administration, Educational Services and Health Care & Social Assistance are among the critical industries.

While such uncertainties have taken some of the “wind out of our sales,” as a panelist in Professional, Scientific & Technical Services cleverly wrote, the subindex data was again a portrait of resiliency. Growth in the Business Activity Index slowed, with the reading down 0.1 percentage point to 54.4 percent, but that was offset by faster rates of growth in new orders, employment and supplier deliveries.

The Employment Index reading was perhaps most encouraging, as it increased 1.6 percentage points to 53.9 percent, its highest level since December 2021 (54.6 percent). That contrasted a private payrolls report by ADP and the Stanford Digital Economy Lab that wasn’t gangbusters, revealing 77,000 jobs added in February.

“It wasn’t a huge jump, but we’re seeing consistent growth,” said Miller, who noted that the Employment Index expanded for the fifth straight month.

In other subindex news:

  • The Inventories Index — which in January stayed in contraction territory, despite anxiety over looming tariffs — increased to 50.6 percent in February. However, the Inventory Sentiment Index reading of 54.7 percent suggests companies feel their stock levels are still too high.
  • That the Imports Index remained in contraction at 49.6 percent suggests there still wasn’t a rush to get ahead of tariffs, Miller said.
  • The Backlog of Orders Index figure of 51.7 percent ended a six-month stay in contraction territory and was the highest reading since July 2023 (52.1 percent). That’s a good sign for demand, Miller said, though he noted that many services companies — including 43 percent of those surveyed in February — do not measure order backlogs.

The Report On Business® roundup:

Bloomberg: U.S. Services Expand at Faster Pace on Robust Employment Growth. “(The Prices Index) 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.”

CNBC: Factory Orders Up 1.7% in January. “Very positive,” analyst Rick Santelli said. “At 53.5 percent, that’s a full point better than expected. … The Employment Index, after a weaker ADP (report) and in front of the big (federal) jobs report, it comes in at 53.9 percent. That’s a solid read, the best read since going all the way back to December 2021.”

MarketWatch: U.S. Economy is Still Growing, ISM Says, but Trump Tariffs Cause ‘Great Uncertainty’ and More Inflation. “The good headline number masked growing uncertainty among senior executives as they tried to gauge the effects of the president’s tariffs and government spending cuts on their businesses.”

Reuters: U.S. Service Sector Expands in February; Price Growth Accelerates. “The (New Orders Index) rose to 52.2 percent last month from 51.3 percent in January. That helped to lift (the Prices Index) to 62.6 percent from 60.4 percent in January. ISM reported on Monday that the (Manufacturing Prices Index) jumped to nearly a three-year high in February. The Trump administration's tariffs on Canadian, Mexican and Chinese goods are expected to raise prices for items as small as avocados to as big as motor vehicles.”

In case you missed Monday’s Report On Business® Roundup on the release of the February Manufacturing PMI®, you can read it here. The Hospital PMI® will be released on Friday. For the most up-to-date content on the reports under the ISM® Report On Business® umbrella, use #ISMPMI on X, formerly known as Twitter.

(Photo credit: Getty Images/Grandbrothers)

About the Author

Dan Zeiger

About the Author

Dan Zeiger is Senior Copy Editor/Writer for Inside Supply Management® magazine, covering topics, trends and issues relating to supply chain management.