US Services Sector Holds Firm, But Inflation Looms

Oliver Scott

Economic

Remarks of Officials

Central Bank

Data Interpretation

Summary:

Stable US services in January mask surging costs and cooling demand, hinting at renewed inflation risk.

The U.S. services sector remained stable in January, but a significant jump in business costs is signaling renewed inflationary pressure, potentially reversing a recent cooling trend.

The Institute for Supply Management (ISM) reported that its non-manufacturing PMI was unchanged at 53.8 last month. This figure, which indicates expansion, beat economists' forecasts of 53.5 and suggests the economy started the first quarter on steady footing. The services sector is a critical barometer, accounting for over two-thirds of all U.S. economic activity.

Rising Costs Point to Inflationary Risk

While the headline number was stable, a closer look reveals mounting cost pressures. The ISM survey's measure of prices paid by businesses climbed to 66.6 in January from 65.1 in December.

This increase coincided with signs of supply chain strain. The supplier deliveries index rose to 54.2, its highest level since October 2024. A reading above 50 signifies slower delivery times, which may have been worsened by frigid temperatures and heavy snow across the country.

This development presents a challenge to the view that inflation is firmly under control. Federal Reserve Chair Jerome Powell recently described the impact of import tariffs as a likely "one-time price increase." The central bank left its benchmark interest rate unchanged in the 3.50%-3.75% range last week.

New Orders Weaken as Exports Plunge

Growth in new business moderated, with the new orders gauge falling to 53.1 from 56.5. A sharp contraction in foreign demand was a primary driver of this slowdown. The measure for export orders collapsed to 45.0, its lowest reading since March 2023, down from 54.2 in the prior month.

This slump in exports may be linked to geopolitical friction. Respondents in the ISM's January manufacturing survey noted that U.S. tensions are fueling "anti-American" sentiment among buyers. President Donald Trump has implemented broad tariffs and last month announced temporary American control over Venezuela after capturing President Nicolas Maduro. He also threatened new tariffs against European allies over the sale of Greenland before retracting the statement.

Hiring in the Services Sector Slows

The employment picture in the services sector also softened. The ISM's employment index slipped to 50.3 from 51.7 in December, indicating a much slower pace of hiring.

A more comprehensive view of the labor market remains pending, as the Department of Labor's official employment report for January has been delayed following the partial government shutdown that ended on Tuesday.

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