US service sector growth slows as input prices surge
The ISM services index fell to 54.0 in March as input prices saw their largest jump in 13 years. The Iran conflict is fueling inflation and economic uncertainty.
The services sector in the United States experienced a slowdown in growth during March, while the prices businesses pay for inputs climbed at the fastest rate in over 13 years. This surge in inflationary pressure is largely attributed to the ongoing conflict with Iran, which has disrupted supply chains and increased costs across multiple industries.
Data from the Institute for Supply Management (ISM) revealed that the nonmanufacturing purchasing managers index (PMI) fell to 54.0 last month from 56.1 in February. While the reading remains above the 50-point threshold that separates expansion from contraction, it came in below the 54.9 level anticipated by economists. Despite the overall cooling, 13 service industries reported growth, including wholesale trade, transportation, and construction. Conversely, retail trade and public administration were among the sectors reporting a decline.
The geopolitical tensions involving Israel have significantly impacted the energy sector, with global prices for Brent Crude Oil rising by more than 50%. This spike has pushed the national average for retail gasoline above $4 a gallon, contributing to a 7.7 percentage point jump in the ISM’s prices paid index, which reached 70.7—its highest level since late 2022.
"With employment softening and inflation pressures flaring up again, the data suggest slower growth alongside sticky price pressures," said Priscilla Thiagamoorthy, a senior economist at BANK OF MONTREAL.
In addition to energy, businesses are facing higher costs for raw materials. Steve Miller, Chair of the ISM Services Business Survey Committee, noted that prices for construction essentials such as lumber, steel, and Copper have trended upward. Logistics challenges have also intensified, with wholesalers reporting that threats to the Strait of Hormuz and rising war-risk surcharges are inflating shipping costs.
"Companies across many industries reported seeing higher gas and diesel pricing, and inventories of multiple goods increased to withstand supply chain disruptions or short-term oil price impacts," Miller stated.
The combination of cooling activity and rising costs has complicated the outlook for the Federal Reserve. Although new orders rose to a two-year high of 60.6, the survey’s measure of employment fell to its lowest point since December 2023. While this decline contrasts with other government data showing strong job growth, it highlights the growing headwinds facing the service sector.
"ISM prices paid is a very useful indicator of trends in inflation and this reading should be disconcerting to the Fed and is consistent with inflation running close to 4%," said John Ryding, chief economic advisor at Brean Capital.