US Service Sector Growth Nearly Brakes in March

The U.S. services sector slowed to a nine-month low in March, backing expectations that economic growth likely braked sharply in the first quarter amid uncertainty caused by import tariffs.

The Institute for Supply Management (ISM) said on Thursday that its nonmanufacturing purchasing managers index (PMI) dropped to 50.8 last month, the lowest reading since June 2024, from 53.5 in February. Economists polled by Reuters had forecast the services PMI easing to 53.

A PMI reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of the economy. The ISM associates a PMI reading above 49 over time with growth in the overall economy.

The PMI added to downbeat surveys of consumers and businesses as well as so-called hard data like consumer spending and inflation, that have raised concerns of stagflation. The odds of a recession over the next 12 months have also risen.

President Donald Trump's barrage of tariffs since returning to the White House in January have sapped business and consumer sentiment, casting a pall over the once-resilient economy.

Gross domestic product estimates for the first quarter are mostly below a 0.5% annualized rate, with the chances of a contraction high. The economy grew at a 2.4% pace in the October-December quarter. Meanwhile, inflation has picked up, blamed on import duties already imposed or pending.

Trump said on Wednesday he would impose a 10% baseline tariff on all imports to the United States and higher duties on some of the country's biggest trading partners.

Fitch Ratings estimate that the new tariffs would be the highest in more than a century.

Trump sees tariffs as a tool to raise revenue to offset his promised tax cuts and to revive a long-declining U.S. industrial base. Economists disagree and view the import taxes as harmful.

ORDERS LACKLUSTER

The ISM survey's new orders measure dropped to 50.4 last month from 52.2 in February. Though output increased, that was likely due to businesses rushing to complete pending work before tariffs came into effect. A gauge of backlog orders plunged to 47.4 from 51.7 in February.

With growth almost braking, the survey's measure of prices paid for services inputs fell to a still-high 60.9 from 62.6 in February. Diminishing demand for services could constrain businesses' ability to raise prices.

Goods prices are, however, likely to continue rising as tariffs snarl supply chains. The ISM said on Tuesday that its measure of prices paid by factories surged to the highest level in nearly three years in March.

Suppliers' delivery performance improved last month. The ISM survey's supplier deliveries index fell to 50.6 from 53.4 in February. A reading above 50 indicates slower deliveries.

The survey's measure of services employment tumbled to

46.2, the lowest level since December 2023, from 53.9 in February. It has not been a reliable predictor of services payrolls in the government's closely watched employment report.

Labor conditions continue to steadily ease. There were 1.07 job openings for every unemployed person in February, down from 1.13 in January, the government reported on Tuesday.

Government data on Friday is likely to show that nonfarm payrolls increased by 135,000 jobs in March after rising 151,000 in February, a Reuters survey predicted. The unemployment rate is forecast unchanged at 4.1%.