Services Economy Sees Accelerated Growth
The latest data from the ISM Services PMI report reveals a continued expansion of the U.S. services sector in February. Nearly all subindexes registered growth, with employment, new orders, and prices experiencing further acceleration from January. The overall Services PMI increased, indicating that the services economy, which makes up a significant portion of the U.S. economy, expanded at a steady pace.
Among the few areas that saw a decline, imports fell at an accelerating rate, which could be beneficial for GDP. Recent surges in imports during December and January, reportedly due to companies attempting to navigate anticipated tariff policies, appear to have subsided. However, price hikes remain a concern, as 16 of the 18 service industries reported an increase in the cost of goods and services. The Prices Index rose to 62.6%, marking the third consecutive month above 60%—a level not seen since March 2023. This suggests that inflationary pressures in the services sector may be intensifying.
Rising Prices and Tariff Speculations
Data from the U.S. Services PMI show that 32.4% of respondents reported paying higher prices in February, up from 25% in January. The progression over recent months suggests a growing trend in price increases, with fewer companies reporting stable or declining costs. However, these figures reflect prices paid by companies rather than those charged to consumers, raising questions about how much of these costs will be passed down.
Interestingly, the tariffs that have been widely discussed and speculated upon have yet to be implemented. Despite this, businesses appear to be preemptively adjusting their pricing strategies in response to the uncertainty surrounding potential trade policies. The current price hikes bear a resemblance to inflationary patterns seen in 2021-2022, where businesses leveraged external factors as a justification for raising prices. The growing acceptance of higher costs among both businesses and consumers could be setting the stage for another inflationary wave.
Profitability at Risk Despite Inflationary Trends
A separate U.S. Services PMI report from S&P Global presents a more cautious outlook. While acknowledging rising costs, the report indicates that many businesses are struggling to pass on these expenses due to competitive pressures and weak market demand. Companies have been forced to absorb higher input costs, particularly in labor and supplies, which could impact profitability in the long run.
The report highlights that input cost inflation in February reached a four-month high, yet service providers were only able to raise their prices modestly. Competitive market conditions have limited its pricing power, preventing it from fully offsetting cost increases. This development suggests that while inflationary pressures persist, they are not yet translating into proportionate consumer price hikes across the board.
Despite these challenges, companies continue to explore ways to enhance their “pricing power,” a key factor in maintaining profitability. The ability to raise prices without losing sales remains a critical advantage, and businesses are closely monitoring market conditions to determine how much flexibility they have in adjusting their pricing strategies.
