The U.S. services sector showed growth in April, with the Institute for Supply Management (ISM) reporting a rise in its nonmanufacturing purchasing managers index (PMI) from 50.8 in March to 51.6. This marks a positive sign for the economy, despite rising inflation pressures due to tariffs and federal spending cuts. The services sector, which comprises more than two-thirds of the U.S. economy, continued to expand, although uncertainty surrounding tariffs has sparked concerns.
Impact of Tariffs on Services Sector
The tariffs imposed by President Donald Trump have raised inflationary pressures, particularly in sectors reliant on imports. Businesses have expressed concerns about the inconsistent implementation of tariffs, especially in industries like real estate, rental, and leasing. These tariffs have created anxiety, leading to growing fears of a recession. The report indicates that some businesses have proactively made purchases to avoid the additional costs caused by tariffs, contributing to the increase in the services PMI for April.
Job Growth and Economic Outlook
Despite the challenges posed by tariffs, solid job growth in April has provided reassurance that the U.S. economy is not on the brink of a recession. However, economists expect that the services sector will face increasing pressures from rising prices and weaker consumer spending. Disposable incomes are declining, which could affect long-term consumer demand.
Industries Affected by Tariffs
According to the ISM survey, several industries reported growth, including accommodation and food services, wholesale trade, mining, and utilities. However, sectors like finance and insurance, along with public administration, saw contractions. Agriculture, forestry, fishing, and hunting businesses reported negative impacts from tariffs, particularly due to increased costs from Chinese imports, with the tariff rate on Chinese products at 145%.
Concerns in Education and Healthcare Sectors
In the education and healthcare sectors, businesses expressed concern over federal funding cuts, especially for research and social assistance. Healthcare providers also noted price increases from vendors, which they are actively working to counter. The uncertainty surrounding the trade war and federal funding cuts is affecting business stability, with some services providers in a state of crisis.
Strained Supply Chains and Rising Costs
The ISM survey also noted that suppliers’ delivery performance worsened in April, with the supplier deliveries index rising to 51.3, indicating slower deliveries. This delay in supply chain processes is likely linked to businesses rushing to make purchases before the tariffs hit, leading to a rise in input costs. The survey showed a significant increase in prices paid for services inputs, which surged to 65.1, the highest since January 2023.
Employment Trends in Services Sector
Employment in the services sector continued to decline, although the pace of decline slowed. Companies reported filling many vacant positions but also noted hiring freezes due to uncertainty regarding government grants. The ISM survey’s services employment measure increased to 49.0 from 46.2 in March. The stability of the labor market remains a crucial factor for sustaining consumer spending and economic growth amid tariff-related disruptions.
