The latest Non-Manufacturing Index (NMI) report from the Institute for Supply Management (ISM) reveals a mixed picture of the U.S. service sector, showing continued expansion but at a slower pace than February's robust performance. The March reading of 55.2, while still comfortably above the 50-point threshold indicating expansion, represents a 2.4 percentage point decline from February's 57.6 - the highest level since October 2015.
Key Indicators Show Broad-Based Slowdown
All four core components of the NMI declined in March:
- Business Activity/Production: Dropped 4.7 points to 60.3, though maintaining 92 consecutive months of growth
- New Orders: Fell 2.3 points to 58.9, continuing a 92-month expansion streak
- Employment: Declined 3.6 points to 51.6, marking 37 months of consecutive growth
Additional concerning metrics included inventories falling to 48.5 (indicating contraction), backlogs decreasing to 53, and prices dropping 4.2 points to 57.7.
Sector Performance Shows Diverging Trends
The report revealed significant variation across industries, with 15 sectors reporting growth including:
- Utilities
- Wholesale Trade
- Mining
- Real Estate
- Healthcare
- Transportation
Meanwhile, three sectors reported contraction:
- Information
- Education Services
- Professional, Scientific and Technical Services
Business Sentiment: Cautious Optimism Prevails
Despite the slowdown, survey respondents maintained generally positive outlooks. A construction industry representative noted that while some project growth had slowed, revenue projections remained stable. A public administration respondent reported business recovery but cited labor shortages and legislative impacts as challenges.
Tony Nieves, Chair of the ISM Non-Manufacturing Business Survey Committee, cautioned against overreacting to the March numbers: "When you see NMI down 2.4 percentage points, it's still supported by new orders activity near 60. The first quarter was so strong that 58.9 in new orders might represent a pause, but two years ago this would have been considered an excellent number."
Economic Implications
The March slowdown raises questions about whether this represents a temporary correction after unusually strong February numbers or the beginning of a more sustained deceleration. Key considerations include:
- Market Impact: The data may increase investor caution about economic growth prospects
- Policy Implications: Sustained slowing could influence Federal Reserve interest rate decisions
- Business Investment: Growing uncertainty may cause companies to reconsider capital expenditure plans
Nieves emphasized that despite the March softening, first-quarter cumulative numbers exceeded initial expectations. He characterized the March reading as a modest correction following exceptional February performance rather than cause for significant concern.
The service sector, representing the majority of U.S. economic activity, has now expanded for 87 consecutive months. While the March report suggests some loss of momentum, the overall expansion remains intact, leaving economists and policymakers to watch upcoming data for confirmation of whether this represents a temporary pause or the beginning of a more significant slowdown.