Services PMIs
Once again, two surveys, two readings.
S&P Global: Output growth continues to slow in February as demand falters
The seasonally adjusted S&P Global US Services PMI Business Activity Index recorded 51.0 in February. Although above the critical 50.0 no-change to signal further growth of the sector, the rate of expansion was modest and the slowest since November 2023. Growth has softened noticeably in 2025 so far compared to the robust rates seen during the second half of last year.
Panelists widely linked the weaker rise in business activity to a concurrent slowdown in new business growth. Although still rising, extending the current run of expansion to 10 months, the rate of expansion was modest and the slowest in this sequence. Uncertainty related to federal government policies around trade tariffs were reported to have weighed on demand growth both at home and abroad. Concerning the latter, new export business declined for a second successive month in February and to the greatest degree since May 2024.
The weaker trend in new business, and broader economic uncertainty, weighed heavily on service sector business confidence. The latest data showed a steep deterioration in sentiment to its lowest since September, dropping well below its long-run trend in February. That said, firms still expect on average activity to rise from present levels in 12 months’ time. Some panelists noted hopes that President Trump’s new administration would generate an improvement in the business environment in the coming months.
Subdued trends in activity and new work meant firms were broadly unwilling to replace leavers in February and this was key in explaining a first modest drop in overall employment for three months.
Despite the reduction in headcounts, service providers were able to comfortably keep on top of their workloads. Outstanding business declined in February for the first time since last August and to the greatest degree since December 2023.
A broad range of goods and services were reported to have risen in price during February, with suppliers in some cases increasing their charges due to tariffs. Labor expenses were also reported to have increased. Overall, input cost inflation picked up in February to its highest level for four months and further above its long-term trend.
However, efforts to pass on higher input costs to clients were somewhat limited by competitive pressures, weak market demand and market oversupply. This meant that prices charged rose only modestly overall in February.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence
(…) “Current output growth has downshifted markedly so far this year from a booming rate of expansion in December to a disappointingly sluggish pace in February.
“Expectations for output growth have also been revised sharply lower as service providers have become increasingly worried over signs of slower demand growth and uncertainty over the impact of new government policies, ranging from tariffs and trade policy to federal budget cutting.
“The strong private sector hiring seen late last year has consequently gone into reverse, with a steep fall in backlogs of work hinting at further job losses to come.
“Adding to the gloomier picture in February was a sharp rise in costs, which companies were often unable to pass on to customers due to weak demand. While this reduced pricing power is good news for inflation, it’s potentially bad news for profitability.”
The ISM: Service Sector Pushes Through Policy Uncertainty in February
The ISM Services Index improved to 53.5 last month. Current activity was little changed over the month with the business activity index down a tick and still comfortably in expansion territory at 54.4. Rather, the improvement stemmed from the employment index, which rose 1.6 points to an 18-month high, and an increase in new orders (+0.9 points).
Some of this improvement in new orders may reflect a pull-forward of activity as the prospect of a higher tariff environment came to the fore at the start of last month with only an eleventh-hour reprieve on tariffs on Canada and Mexico, which have subsequently gone into effect.
As in the manufacturing sector, the scramble to secure product led to a rise in the services supplier deliveries index in February (+0.4 points). Businesses also appeared to be stocking up on product ahead of potentially higher prices, with the inventory index rising just over three points last month.
Source: Institute for Supply Management and Wells Fargo Economics
While the looming threat of tariffs left a limited mark on activity in February, the anticipation may nonetheless already be seeping into prices. It is worth remembering that many industries within the Services Index are goods or goods-adjacent industries, such as construction, transportation, wholesaling and retailing.
Perhaps it is no surprise then with additional tariffs on China put in place at the start of February and the threat of tariffs on Canada and Mexico lingering that the prices paid component rose 2.2 points to remain above 60. Over the past three months, the prices paid component has averaged 62.5, which, as seen in the nearby chart, is a level only recently rivaled during the pandemic’s aftermath and the increased use of tariffs in the first Trump administration. Concerns about tariffs were widespread across respondents in industries including food services & accommodation; agriculture; construction; information; management and wholesale trade.
For the better part of the past two years, the ISM surveys have displayed the uneven fortunes of the manufacturing and services industries under tight monetary policy. The tail end of last year suggested that the unusually persistent gap between the two sectors was starting to close through the favorable route of stronger factory activity. The latest surveys highlight the more immediate threat of trade policy changes to the manufacturing sector, but we would not be surprised to see more universal signs of suffering under tariffs and policy uncertainty in the ISM Services Index in the months ahead.
One constant in the two surveys is that prices are rising and in both goods and services as Ed Yardeni illustrates
Information collected on or before February 24, 2025.
Overall economic activity rose slightly since mid-January. Six Districts reported no change, four reported modest or moderate growth, and two noted slight contractions.
Consumer spending was lower on balance, with reports of solid demand for essential goods mixed with increased price sensitivity for discretionary items, particularly among lower-income shoppers.
Unusual weather conditions in some regions over recent weeks weakened demand for leisure and hospitality services. Vehicle sales were modestly lower on balance.
Manufacturing activity exhibited slight to modest increases across a majority of Districts. Contacts in manufacturing, ranging from petrochemical products to office equipment, expressed concerns over the potential impact of looming trade policy changes.(…)
Residential real estate markets were mixed, and reports pointed to ongoing inventory constraints. Construction activity declined modestly for both residential and nonresidential units.
Some contacts in the sector also expressed nervousness around the impact of potential tariffs on the price of lumber and other materials.
Agricultural conditions deteriorated some among reporting Districts.
Overall expectations for economic activity over the coming months were slightly optimistic.
Employment nudged slightly higher on balance, with four Districts reporting a slight increase, seven reporting no change, and one reporting a slight decline.(…)
Labor availability improved for many sectors and Districts, though there were occasional reports of a tight labor market in targeted sectors or occupations. Contacts in multiple Districts said rising uncertainty over immigration and other matters was influencing current and future labor demand.
Wages grew at a modest-to-moderate pace, which was slightly slower than the previous report, with several Districts noting that wage pressures were easing.
Prices increased moderately in most Districts, but several Districts reported an uptick in the pace of increase relative to the previous reporting period.
Input price pressures were generally greater than sales price pressures, particularly in manufacturing and construction. (…)
Firms in multiple Districts noted difficulty passing input costs on to customers. However, contacts in most Districts expected potential tariffs on inputs would lead them to raise prices, with isolated reports of firms raising prices preemptively.
Tomorrow we get the important employment report.
S&P Global sees employment as weakening, the ISM as still strong and the Beige Book as softish.
The ADP report, not the best indicator, was quite weak in February with private sector employment up only 77k, following a slightly upwardly revised January increase (+3k to +186k). Employment in the services sector rose 36k (vs. 121k per month on average in 2024). Employment in goods-producing industries increased by 42k, reflecting a 26k increase in construction employment.
Median annual pay for job stayers increased 4.7% year-over-year in February, unchanged from the January pace.
Payrolls at firms that employ fewer than 10 people fell by some 124,900 from the previous month, a drop of 1%.
The declines were broad-based, showing up in all 12 employment sectors included in the survey. Leisure and hospitality posted the steepest drop in payrolls, at 1.3%, followed by the information industry. (…)
Indeed job postings have turned down since early January:
Americans are worried:
Consensus sees payroll growth at +170k. Hmmm…
Changing plans, not for the better. “If policy uncertainty persists, consumers and firms may begin to hold back spending decisions. Combined with DOGE-driven layoffs, this will put upward pressure on the unemployment rate. That is why a trade war, by definition, is a stagflation shock: Higher prices and lower sales. The biggest downside risk is that policy uncertainty could create a sudden stop in the economy where consumers stop buying cars, stop going to restaurants, and stop going on vacation, and companies stop hiring and stop doing capex. ” (Apollo)
Canada: Tariff concerns lead to accelerated contraction of servicesector in February
Canada’s service sector suffered its steepest fall in activity for nearly a year during February amid reports of a drop in market demand due to tariff concerns. New business received declined markedly, whilst confidence in the outlook slumped to its lowest level in over two-and-a-half years. Job losses were the steepest recorded by the survey since June 2020 as firms responded to weak current demand and an increasingly uncertain outlook.
On the price front, input costs showed the largest monthly increase in operating expenses since last October whilst output charges were also raised to a stronger degree.
We should worry about these sharply declining demand indicators:
Some people are worried as Axios observes. “On February 11, the market put just a 1% probability on the Fed cutting rates four times this year, assuming each cut is 25 basis points. Today, the probability of at least four cuts has risen to 30%, while the probability of three or more rate cuts has ballooned to 62%.”
Data: Polymarket. Chart: Axios Visuals
Euro area economic growth remains marginal
The HCOB Eurozone Services PMI Business Activity Index signalled a third successive monthly expansion in output. However, at 50.6 in February, the measure was down from 51.3 in January to a three-month low, indicating a loss of growth momentum.
Weighing on the strength of the upturn was a renewed drop in new business. For the first time since last November, new orders decreased. Demand for euro area services from non-domestic customers weakened, but to the softest extent in seven months.
A pick-up in activity alongside lower new order intakes facilitated yet another drop in backlogged work in February. Stronger inroads to incomplete business were made, with the pace of depletion at its quickest for just over a year. Eurozone service providers still lifted employment levels, albeit to an extent that was only marginal overall and softer than in January.
Cost pressures remained elevated, with input costs increasing at a rate unchanged from January’s nine-month high. In turn, the latest survey data pointed to another historically sharp rise in output prices that was the most substantial for ten months.
Commenting on the PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said:
“The Eurozone economy has barely grown for two months in a row now, as the mild growth in the services sector is almost fully eaten up by the recession in the manufacturing sector. The good news is that the downturn in the manufacturing sector is softening, which could pave the way for a recovery of the whole economy.“Ahead of the next ECB meeting, all eyes are on the wage-driven input cost increases given the central bank’s emphasis on services inflation. With no sign of input cost inflation abating, it is understandable that there are some voices in the ECB who would like to discuss a pause in rate cuts at the next meeting.
“Service provider’s optimism about future activity is falling short of the long-term average, as the environment is strongly marked by political uncertainty in France and Germany as well as a flow of international news which does not encourage consumer spending. At the same time, outstanding business shrank again, which fits into this picture. However, service providers retain some pricing power as selling price inflation has increased compared to January. Overall, the picture is not bleak, but fragile.
“There is a big contrast in service sector performance between Germany and France. Germany’s services sector is growing at a moderate pace while in France, activity is shrinking rapidly and much faster than during the months before. This may be the result of an unsolved political crisis in France, while in Germany the elections may raise hope for a stable government to be formed soon.”
China: Modest growth of service sector sustained in February
The headline Caixin China General Services Business Activity Index recorded 51.4 in February. That was an improvement on January’s reading of 51.0 and represented a modest expansion of the service sector. (…)
Panellists reported that February’s expansion of activity was driven by a combination of higher sales, the start-up of new projects and promotional work. Increased new business volumes were indeed recorded during the month, although growth was also modest and – as was the case with activity – still below its historical trend level. Still, firms reported an improvement in general market demand and heightened success in converting this into actual new contract wins. Foreign sales also rose since January, with growth of new export business solid and its highest in three months.
The more positive market environment meant that employment levels rose fractionally in February with some firms directly linking growth to higher new work volumes. The broad stabilisation of staffing levels followed two months of falling employment and helped firms to largely keep on top of their overall workloads. Latest data showed that outstanding business was down for a second month running in February.
A heightened confidence in the outlook also helped to support some recruitment activity in the latest survey period. Optimism improved to its highest level since last November. Firms are hopeful of stronger market demand and better economic conditions. (…)
On the price front, February’s survey data signalled little change in input costs, though the fractional decline was significant in being the first time that prices had failed to rise since June 2020. Panellists reported that lower market demand, plus a general reduction in the price of some raw materials, had weighed on operating expenses. A marginal decline in output charges was also registered in February as firms sought to pass on reduced input costs and offer promotional discounts in a competitive market environment.
The Trump Tariff Roller Coaster He gives a month reprieve to car makers but everyone else loses.
Welcome to the Trump tariff thrill ride, where you never know what’s going to happen next. (…)
White House press secretary Karoline Leavitt said the one-month exemption is to ensure U.S. auto makers are “not at an economic disadvantage” before the President’s tariffs on auto imports from other countries take effect on April 2.
The exemption may also be less than meets the eye. According to the White House statement, the exemption will apply to cars imported from Mexico and Canada. That means manufacturers could still get whacked with tariffs on parts and materials that cross the border, which could add thousands of dollars to the cost of each vehicle.
Manufacturers that assemble cars in North America would still be at a competitive disadvantage. Mr. Trump said in his speech to Congress Tuesday that his policies would allow “our auto industry to absolutely boom.” Executives, investors and dealers beg to differ. General Motors stock is down 11.9% since Mr. Trump’s election while Ford Motor’s is 13.5% lower. (…)
Mr. Trump originally justified the tariffs under an emergency law to combat the alleged threat of fentanyl. But he claimed Tuesday the tariffs are needed because “we pay subsidies to Canada and to Mexico of hundreds of billions of dollars” and have “very large deficits with both of them.”
That sounds like White House protectionist in chief Peter Navarro. He and his boss love tariffs for their own sake. Meanwhile, the tariff barrage is causing economic uncertainty and slowing investment—a real thrill a minute. (WSJ Editorial Board)
Some suppliers, including producers of kitchenware and clothing, have been asked to lower their prices by as much as 10% per round of tariffs, essentially shouldering the full cost of Trump’s duties, according to the people, who asked not to be identified as the information is private. Negotiations are held with individual manufacturers and the price cuts differ by firm, they said.
So far, few have acquiesced. Suppliers’ margins are already razor thin due to Walmart’s strategy of procuring goods cheaply in order to maintain its competitive advantage, according to the people.
For some, any reduction greater than 2% would see them make a loss, the people said. Others have had their own upstream vendors refuse requests to cut prices more than 3%, forcing manufacturers to consider purchasing some parts from Vietnam, according to one of the people. That move has raised concerns that the lower prices will come at the expense of product quality, the person said. (…)
The retailer has historically had strong bargaining power over its Chinese suppliers and requests for lower prices have mostly been met, according to people familiar with the matter. But the scope of the recent requests are unusual and leaves manufacturers weighing whether to absorb the costs to maintain a longer-term business relationship. (…)
Walmart has said about two-thirds of its products are sourced in the US after the retailer sought to diversify its supply chain.
TECHNICALS WATCH
Ed Yardeni:
- “Will S&P 500 indexes find support at their 200-day moving averages? We think so. Sentiment is quite bearish and the next batch of economic indicators should confirm the economy is growing.”
- “Will the Nasdaq remain in its bullish channel? We expect to see some dip-buying following the rapid selloff.”
Interactive Brokers notes that
“the inverted yield curve is back! Three-month Treasury bills are now yielding more than 10-year notes, though the 2-10 portion of the curve remains normally upward sloping”:
Yield Spreads Since 1985, 2-10 (white), 3mo-10-year (blue); with NBER Recession Starts (red) and Ends (green)
- “Fed Funds futures are now pricing in 3 rate cuts for 2025, which is up from the expectations for only 1 cut that prevailed just a few weeks ago. Economic expectations have retreated sharply, exacerbated by yesterday’s tariff implementation. That’s a nasty combination for bankers. Their net cost of funding has remained stable even as the yields on potential loans have declined, while at the same time, weaker economic prospects do nothing positive for their customers’ creditworthiness. No wonder why those stocks suffered.”
Trump Administration Disbands Two Committees Advising on Economic Stats
Members of one group, the Federal Economic Statistics Advisory Committee, were told Tuesday that Commerce Secretary Howard Lutnick disbanded the committee last week because its mission “has been fulfilled,” in an email seen by The Wall Street Journal.
The Commerce Department also terminated a second expert group, the Bureau of Economic Analysis Advisory Committee, which consulted on a separate group of economic stats. (…)
A Fesac committee member, economist Erica Groshen, said the group played a critical role in guiding the offices that track U.S. inflation, employment and economic growth.
“Its work goes to the essential transparency of these statistical agencies,” Groshen said of Fesac. “When you remove that transparency, then that diminishes trust.”
Fesac guided government statistics for 25 years. (…)
The committees’ dismantling comes at a challenging moment for the government statistics agencies, which have faced tight budgets and falling response rates to surveys that are essential gauges of the health of the economy.
The move also follows a suggestion from Lutnick over the weekend that the government could change how it calculates the size of the economy by separating government spending, which would be a sharp departure from academic theory and international norms.
Fesac met twice a year to advise government statisticians and economists on how to improve and refine their surveys and calculations. Members weren’t paid for their work. (…)
Groshen, who was previously head of the Bureau of Labor Statistics, said Fesac had an especially important role advising on statistics that combine the work of multiple government agencies. That includes the Federal Reserve’s preferred inflation metric, the personal-consumption expenditures price index, which melds analysis from both the Labor Department and the Commerce Department.
“These advisory committees are really essential to maintaining the quality of the data going forward,” she said.