The latest Non-Manufacturing Index (NMI) report from the Institute for Supply Management (ISM) reveals a complex picture of the US service sector. While non-manufacturing activity continues to expand, underlying risks - particularly from tariff policies - are beginning to surface.
Continued Expansion, But Growth Momentum Slows
The NMI registered 58.8 in March, slightly down from February's 59.5 and January's record high of 59.9, but still well above the 50-point threshold that separates expansion from contraction. This marks the 98th consecutive month of growth for the non-manufacturing sector, supporting the broader US economic expansion now in its 103rd month.
While the March reading exceeded the 12-month average of 57.7 by 1.1 percentage points, it fell below the first-quarter average of 59.4, suggesting some moderation in growth momentum.
Sector Performance: Winners and Losers
Fifteen non-manufacturing industries reported growth in March, led by:
- Mining: Benefiting from rising energy prices and infrastructure investment
- Transportation & Warehousing: Driven by e-commerce growth and logistics demand
- Retail Trade: Supported by strong consumer confidence and spending
- Construction: Fueled by infrastructure projects and real estate activity
- Healthcare: Growing due to aging population and increased demand
However, education services and information technology sectors contracted, highlighting divergent trends within the service economy.
Key Indicators Paint Mixed Picture
Other critical metrics from the report show:
- Business Activity Index: 60.6 (down 2.2%), marking 104 months of expansion
- Employment Index: Rose 1.6% to 56.6, with 49 months of job growth
- Supplier Deliveries Index: Increased 3% to 58.5, indicating slower deliveries
- Prices Index: Up 0.5% to 61.5, showing persistent inflation pressures
Most notably, the New Orders Index fell 5.3%, though it maintained its 86-month growth streak. ISM Non-Manufacturing Business Survey Committee Chair Tony Nieves identified this cooling demand as the primary factor behind March's NMI decline.
Tariff Concerns Cloud Business Outlook
Survey comments revealed significant anxiety about tariff policies. A construction sector respondent noted extreme volatility in steel and aluminum prices, with distributors unable to guarantee quotes beyond seven days compared to previous 30-day stability. Financial services firms expressed concern about tariff-related cost increases potentially affecting end prices.
Nieves observed that tariffs are impacting business psychology, with companies worried about potential input cost increases even before policies take full effect. While market reactions remain volatile, the ISM report focuses on actual business conditions rather than speculation.
Supply Chain Constraints Persist
Despite these challenges, Nieves characterized first-quarter performance as robust, comparable to late 2017. He highlighted ongoing capacity constraints in container shipping, trucking, and driver availability as persistent issues requiring resolution.
Looking ahead, the non-manufacturing sector faces both headwinds and tailwinds:
- Challenges: Potential global slowdown, trade protectionism, and geopolitical risks
- Opportunities: Continued domestic recovery, productivity gains from technology, and steady consumer demand
Sector resilience will depend on businesses' ability to adapt to market changes, improve operational efficiency, and leverage technological innovation while navigating policy uncertainties.