The U.S. service economy experienced a slowdown in March, with growth decelerating and employment shrinking by the largest margin since 2023. A key indicator of prices paid for services and materials, measured by the Institute for Supply Management, jumped to 70.7, marking the highest reading since October 2022. This figure indicates a significant acceleration in input prices.
This slowdown in the service sector coincides with rising inflation pressures, partly attributed to the prolonged conflict with Iran. The ISM survey's measure of prices paid by businesses for inputs soared by 7.7 percentage points to 70.7. This gauge has remained above 60 for 16 consecutive months, and the recent increase was the largest in over 13 years. The Middle East conflict, now in its second month, was a dominant theme in the ISM commentary, with businesses across various sectors reporting increased uncertainty and higher costs due to the situation.
Despite a sharp rebound in overall job growth in March, the ISM survey showed that services employment contracted to its lowest level since December 2023. However, this may not fully reflect the health of the broader labor market, as government data indicated a significant increase of 143,000 in private service-providing payrolls. Businesses also reported strong order growth during the month. The ISM's nonmanufacturing purchasing managers' index slipped to 54.0 in March from 56.1 in February, missing economists' forecasts of 54.9. A reading above 50 still signifies growth in the service sector, which constitutes over two-thirds of U.S. economic activity. Thirteen service industries reported growth, including wholesale trade, transportation and warehousing, mining, construction, and utilities.
The conflict has led to a more than 50% increase in global oil prices, pushing the national average retail gasoline price above $4 a gallon for the first time in nearly four years. This is expected to impact the March Consumer Price Index report. Companies across various industries, including construction, reported higher gas and diesel prices, and increased inventories to mitigate supply chain disruptions or short-term oil price impacts. Specific construction materials like lumber, copper, and steel were also noted to have increased in price. Supplier deliveries have also lengthened, with the measure increasing to 56.2 from 53.9 in February, indicating slower deliveries and mirroring similar trends in manufacturing. This reinforces expectations that the Federal Reserve will likely maintain interest rates for an extended period, as the data suggests slower growth coupled with persistent price pressures.
Wholesalers specifically noted that "landed costs have increased materially," and businesses in the accommodation and food services industry stated that while tariff rollbacks had initially offered some favorable price adjustments, the ongoing news of new implementations was fueling continued uncertainty. Concerns were also raised about threats to close the Strait of Hormuz and rising war-risk surcharges impacting regional logistics costs, even for air freight. The anticipated inflationary fallout from the conflict has significantly reduced the odds of an interest rate cut this year, with the U.S. central bank having previously left its benchmark overnight interest rate in the 3.50% to 3.75% range.
