Institute for Supply Management’s Non-Manufacturing Purchasing Managers’ Index (PMI), which tracks activity in the U.S. services sector, rose to 53.5 in February—up from 52.8 in January—marking the eighth consecutive month of expansion. This stronger-than-expected reading suggests that businesses across a wide range of service-based industries are continuing to grow, even in the face of mounting cost pressures.
Beneath the headline figure, several key sub-indices showed notable shifts. The Prices Index climbed to 62.6, its third consecutive reading over 60 and a 2.2-point jump from January. That surge reflects significant input-cost inflation, driven in large part by new tariffs and rising labor costs, but also supply chain difficulties.
Supplier deliveries also slowed—registering 53.4, up from 53.0—indicating that supply chains are stretching and orders are taking longer to fulfill. Meanwhile, the new orders index climbed to 52.2, employment strengthened to 53.9, and backlog of orders soared to 51.7, confirming broad-based underlying demand and hiring growth.
New protective duties, including 25% levies on steel and aluminum as well as 10% tariffs on certain Canadian, Mexican, and Chinese imports, have pushed input prices sharply upward. Commodity spot prices—including steel and aluminum—surged about 20% month-over-month, according to ISM’s analysis. Legal economists warn this “cost-push” inflation may ultimately squeeze margins and erode consumer demand.
Recent research underscores this point: following the 2025 wave of tariff increases, U.S. businesses experienced longer delivery delays—on average adding 21 days—and output fell about 7.3%, while prices ticked higher by 1.8%. It’s a wake-up call that tariff shocks create ripple effects far beyond headline inflation data—they affect production planning, inventory management, and eventual output.
The lag in supplier deliveries—meaning vendors are taking longer to ship goods—also reflects challenges firms face in securing materials. Survey respondents noted difficulty in managing stable pricing and reliable inputs as uncertainty grows amid shifting trade policies.
Despite these headwinds, many service firms report steady demand. New order growth and hiring strengthen that notion: employment sub-index rose solidly to 53.9, its fifth straight month of improvement. This aligns with broader economic data showing expansion in non-manufacturing jobs and consumer spending on services.
The 12-month moving average of the services PMI edged up to 52.5—just above its prior-year average of 52.4—indicating that although momentum has cooled from post-pandemic highs, growth remains sustainable. This stability is crucial, as services account for nearly 80% of U.S. economic activity.
Analysts warn, however, that this resilience could be tested if input-cost inflation becomes persistent. A recent Beige Book report highlighted businesses voicing concern that tariff costs may be passed on to consumers later in the year, potentially sharpening price growth by late summer.
The services PMI’s strong performance contrasts with softer signals elsewhere. S&P Global’s flash U.S. Composite PMI Output Index—a combined measure of services and manufacturing—dropped to 50.4, its lowest level in 17 months, as manufacturing activity stalled and businesses reported weaker demand.
In manufacturing, the PMI stood at 50.3, marking only the second month of modest expansion following a long contraction, while its input-cost index hit a 33-month high—painting a picture of cost pressures potentially undermining future production.
Faster-growing services activity gives the Federal Reserve some leeway in interpreting inflation data. Still, the sharp rise in input costs and expectations of slower deliveries are signals that cost pressures are building. Policymakers, already wary of inflation above their 2% target, will likely weigh this input-driven inflation against slowing growth in other sectors.
Tariff-related uncertainty also complicates monetary policymaking. Persistent cost inflation may delay rate cuts, as central bankers aim to ensure inflation trends sustainably downward before easing policy.
For business leaders, the current environment demands strategic adaptation. Many are diversifying supply chains, holding larger inventories, and automating processes to mitigate political risk—and some are passing costs along to consumers where feasibly competitive.
February’s ISM non-manufacturing PMI makes clear that services continue to be the engine of U.S. economic growth. But it also highlights the growing strain on businesses from tariffs and rising labor costs. The rising Prices and Supplier Deliveries indices indicate supply chains are fraying and input costs are squeezing margins, even as demand and employment hold steady.
The services sector remains resilient—but the current phase may be precarious. If tariff-driven cost pressures intensify, service firms may struggle to maintain growth without passing more costs to consumers. For the Fed, it’s a balancing act: supporting growth while preventing inflation from becoming entrenched. The coming months will hinge on trade policy developments, inflation readings, and how firms respond strategically to rising input costs.
February’s report underscores the dual risk: an economy that’s growing and adding jobs, yet contending with rising costs and supply chain challenges. Businesses and policymakers alike should brace for a tighter margin environment, and consumers may soon feel these pressures in the prices they pay.
