MNI INTERVIEW: Tariffs Cloud Outlook Of Strong Services - ISM
MNI (WASHINGTON) - U.S. services activity expanded briskly in February despite some drag from recent federal government cutbacks, thothe outlook is clouded by the Trump administration's tariff policies, ISM Services survey chief Steve Miller told MNI Wednesday.
"Actual activity is strong. We're seeing a good PMI that's been consistently above 50 for over six months," Miller said. But "the cloud over the party is the potential impact of tariffs."
The ISM survey respondents noted "chaos" and "uncertainty" around tariffs. "We saw commentary around products where tariffs have already gone in and that's increased their pricing. We had several comments around forward-looking contracts and the necessity to share risk on potential tariff increases."
The ISM services index increased by 0.7pt to 53.5, somewhat above expectations. "I didn't expect an increase month over month. I expected it to be in the 52-range and this is a bill of confidence in where we're going," Miller said.
The business activity component edged down -0.1pt to 54.4, while the new orders index increased 0.9pt to 52.2 and employment rose 1.6pt to 53.9. The supplier deliveries component increased by 0.4pt to 53.4, indicating slower supplier delivery performance.
Tariff uncertainty is "not disrupting business today" but ISM survey respondents are struggling to deal with how to forecast and prepare for uncertainties, he said. "Other than spending freezes from the federal government, there wasn't anything that came through as a negative impact that is happening today."
HIGHER PRICES
The price index in ISM's February report rose 2.2ppts to 62.6. "We're seeing three months in a row above 60 and it hasn't been like that since March of 2023, near the end of the severe inflationary period. That's an area of concern to see if that continues." (See: MNI INTERVIEW: Fed To Stay Careful Amid Policy Turmoil - Johnson)
There were more commodities up in price compared to last month and that is flowing through the supply chain, he said. "In aluminum products and the stainless steel products we're seeing the flow through of increased input costs into those manufactured products and then across the board we're starting to see commodities go up in price."
"More than 50% of the comments were on uncertainty around forecasts and forecasting, both on the sales side as well as on the input pricing side, due to uncertainty around what the tariff impacts will actually be."
Concern about tariffs are "pretty broad-based," Miller said, adding that 15 of 18 industries tracker commented on potential risk around tariffs.
STRONG HIRING, DEMAND
The new orders subindex increased 0.9ppts to 52.2. "We're seeing consistent strength in new orders within the services industry," Miller said, expressing some concern that weakness from manufacturing could seep into services. "Historically there's been a lag of about three to four in the manufacturing report to the services report. Maybe we'll see that weakness later on but right now there are no signs of weakness."
"One of the good signs is that we have a backlog of orders that is also in expansionary territory and inventories are up," he said. "It doesn't look like there's any negativity in the report this month."
The employment gauge jumped to 53.9, the highest level since December of 2021. Miller is confident the employment index will remain in a range around 53 to 54.
"It doesn't seem like a blip. It seems like that's likely to be sustained, especially with the backlog of orders and continued strength in new orders and business activity."