Services Sector PMI Hits 3 1/2-year High Despite Headwinds
By Reuters | 04 Mar, 2026

Turbulence from tariff uncertainty and memory chip shortages were overcome by non-manufacturing sectors like mining, construction, wholesale tra

he U.S. services sector activity surged to more than a 3-1/2-year high in February as businesses rebuilt inventories in anticipation of strong demand, consistent with hopes for an acceleration in economic growth this quarter.

But the war in the Middle East poses a downside risk to the rosy picture sketched by the Institute for Supply Management survey on Wednesday. U.S. gasoline prices have surged by at least 20 cents per gallon since the U.S. and Israel launched air attacks on Iran last weekend. Tehran has retaliated, broadening a war that analysts said was descending into a wider regional conflict.

"The U.S. economy is off to a decent start and its resilience should help it overcome turbulence from the Iran war, barring an extreme scenario for energy prices," said Sal Guatieri, a senior economist at BMO Capital Markets.

The ISM said its non-manufacturing purchasing managers index increased to 56.1 last month, the highest reading since July 2022, from 53.8 in January. Economists polled by Reuters had forecast the services PMI would ease to 53.5. A reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of U.S. economic activity.

The survey's inventories measure rebounded to 56.4 from 45.1 in January. The ISM reported participants saying that "inventory levels are starting to build up in preparation of the activity for the next three quarters" and that they were "getting ready for spring volume." Business inventories have been drawn down for three straight quarters, government data showed last month.

The PMI reinforced economists' expectations for solid economic growth in the first quarter after gross domestic product slowed to a 1.4% annualized rate in the fourth quarter. The economy grew at a 4.4% pace in the July-September quarter.

Oil prices stayed within sight of multi-month highs on Wednesday as the war disrupted Middle East energy flows.

Goldman Sachs analysts estimated that each $10 per barrel increase in the price of oil would reduce GDP growth in the fourth quarter by about 0.1 percentage point over the fourth quarter of 2025 if prices stabilized at a higher level.

"This estimate reflects a drag on consumption from lower real disposable income, partially offset by higher energy capex," they wrote in a note. "Uncertainty surrounding the length of the conflict and the recent decline in the sensitivity of energy investments to oil prices might limit this capex (capital expenditure) offset, pushing the GDP drag to about 0.13 percentage point."

Fourteen services industries, including mining, wholesale trade as well as utilities, construction and educational services reported growth last month, according to the ISM. Retail trade, arts, entertainment and recreation, and transportation and warehousing were the industries that reported a contraction.

Businesses continued to fret over tariff uncertainty, concerns that were amplified by last month's ruling by the U.S. Supreme Court that struck down the sweeping import duties that President Donald Trump had pursued under a law meant for use in national emergencies. But Trump quickly imposed a 10% global tariff for 150 days to replace some of the emergency duties and then announced it would rise to 15%.

Steve Miller, chair of the ISM Services Business Survey Committee, said despite the rise in commentary on trade uncertainty, "There was no alarm regarding supply chain performance, suggesting that services companies have developed capabilities to routinely address shifts in tariff policies."

Some transportation and warehousing businesses reported that "capacity has been extremely tight, causing rates to spike 30% to 40%." They partly attributed this development to the U.S. government's "push to make sure all (commercial) drivers are proficient in English."

Some retailers said they were experiencing increased cost and lead time from key technology providers because of "random-access memory shortages," adding that "quotes that were normally secure for 90 days are now 30 days or less." 

Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. U.S. Treasury yields were mostly higher.

EXPORT ORDERS REBOUND

The survey's measure of new orders increased to 58.6, the highest level since September 2024, from 53.1 in January. A gauge of export orders rebounded to levels last seen in July 2024. Backlog orders grew for the first time since last February. Its gauge of prices paid by businesses for inputs eased to a still-high 63.0 from 66.6 in the prior month.

Economists at Wells Fargo estimated that a 10% sustained rise in oil prices would add roughly 0.3 percentage point to the year-over-year rate of headline consumer price inflation in the second and third quarters.

The ISM's manufacturing sector survey on Monday showed prices at the factory gate surging in February, which was attributed to rises "in steel and aluminum prices that impact the entire value chain, as well as tariffs applied to many imported goods." 

The ISM's measure of supplier deliveries to service businesses slipped to 53.9 from 54.2 in January. A reading above 50 indicates slower deliveries. Some businesses reported that "trucking issues at the Canadian border are delaying shipments," adding that "with the groundwood market tightening, more orders are being placed and dates pushed out."

The improvement in activity boosted services employment, with the gauge increasing to 51.8 from 50.3 in January. Some businesses said they were hiring in anticipation of strong economic activity, while others noted that immigration enforcement "has caused some staff to not come into work."

The rise in that measure aligns with economists' expectations that the labor market was stabilizing after a wobble last year that was blamed on tariffs. 

That sign of labor market stabilization was reinforced by the release on Wednesday of the ADP's national employment report, which showed private payrolls increased by 63,000 jobs in February after a rise of 11,000 in January.

The Labor Department's Bureau of Labor Statistics is due to publish its closely watched monthly employment report on Friday. Nonfarm payrolls likely increased by 59,000 jobs in February after accelerating by 130,000 in January, a Reuters survey of economists predicted. The unemployment rate is expected to have held steady at 4.3%.    

The stable labor market and firm inflation data are expected to allow the Federal Reserve to keep interest rates unchanged at its March 17-18 meeting.

"The employment picture appears to have stabilized," said John Ryding, chief economic advisor at Brean Capital. "There is no justification for a rate cut here."

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)