Strong Service ISM Reading as activity expanded most since 2022

• ISM Services Index: 56.1
  • Expectations: Exceeded all projections in a Bloomberg survey with median of expectations at 53.5
  • Previous: 53.8 
• New Orders: 58.6 
• Business Activity: 51.8 
• Employment: 51.8 
• Prices Paid: 63 

Commentary

The US service sector expanded in February at its fastest pace since mid-2022, driven by a surge in new orders and robust business activity. The headline index rose to 56.1, significantly outperforming all economists' projections. This data underscores a broad strengthening of the largest segment of the US economy, notably recorded just before the US-Israeli strikes on Iran.

A critical takeaway from the report is the divergence between the manufacturing and services sectors regarding inflation. While the ISM manufacturing survey recently indicated that input prices soared at their fastest rate since 2022, inflationary pressures actually cooled within the services sector, with the prices paid index falling to a nearly one-year low. This cooling occurs despite a massive, unprecedented 11.9-point jump in order backlogs, which reached a four-year high.

The labor market also showed significant strength. Services employment saw healthy growth which was mirrored by separate ADP data showing that US companies added 63,000 jobs in February, the highest monthly gain since July. Fourteen out of eighteen service industries reported growth, led by mining, information, and real estate.

However, business sentiment remains cautious due to external factors. Industry comments highlight that while the current climate is solid, "significant unknown risks" from potential tariff actions by the US government are dampening long-term business investment. Additionally, the mining and agriculture sectors noted that tariff volatility and shifting trade agreements are already materially impacting purchasing operations and import costs.