By Lucia Mutikani
WASHINGTON (Reuters) – The U.S. services sector’s growth picked up in April, while a measure of prices paid by businesses for materials and services raced to the highest level in more than two years, signaling a building up in inflation pressures due to tariffs.
The Institute for Supply Management (ISM) survey on Monday showed services businesses were worried about the impact of President Donald Trump’s tariffs on prices and deep federal spending cuts as his administration seeks to drastically shrink the government.
Trump’s on-and-off again tariffs have heightened uncertainty over the once-resilient economy. Some real estate, rental and leasing firms in the ISM survey described the implementation of import duties as “maddeningly inconsistent.”
Risks of a recession have risen. Trump on Sunday announced a 100% tariff on movies produced outside the United States.
“The negative impact on services activity and inflation from the tariffs and government spending cuts are very real and already beginning to materialize,” said Scott Anderson, chief U.S. economist at BMO Capital Markets. “Without a hard pivot in U.S. tariffs and government spending cuts, we expect the ISM services readings to remain under downward pressure.”
The ISM said its nonmanufacturing purchasing managers index (PMI) increased to 51.6 last month from 50.8 in March. Economists polled by Reuters had forecast the services PMI dipping to 50.2.
A PMI reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of the economy. The ISM associates a PMI reading above 49 over time with growth in the overall economy.
Efforts by businesses and households to get ahead of the import duties likely accounted for some of the rise in the services PMI last month. The ISM survey’s new orders measure increased to 52.3 from 50.4 in March.
Inventories also rose, with some businesses saying they had “purchased some products in advance of tariffs.” Others attributed the rise to increased sales volumes.
“But overall, results are improving,” said Steve Miller, chair of the ISM Services Business Survey Committee.
The survey added to solid job growth in April in offering assurance that the economy was not near a recession despite gross domestic product contracting in the first quarter, burdened by a massive inflow of imports as businesses sought to avoid higher prices from tariffs.
“The economy continued to expand at the start of second quarter, albeit at a slow pace,” said Matthew Martin, a senior U.S. economist at Oxford Economics. “We expect the services side of the economy to fare better than the manufacturing sector this year but will be unable to avoid the impact of higher prices and weaker consumer spending as real disposable incomes decline.”
Stocks on Wall Street were trading lower. The dollar slipped against a basket of currencies. U.S. Treasury yields rose.
TARIFFS, FUNDING CUTS ANXIETY
Eleven industries including accommodation and food services, wholesale trade, mining and utilities reported growth. Among the six reporting a contraction were finance and insurance as well as public administration.
Businesses in the agriculture, forestry, fishing and hunting sector said “tariffs are negatively impacting small business customers,” many of whom “source their products from China.” Trump hiked tariffs on Chinese imports to 145%, sparking a trade war with Beijing.
Educational services companies worried about the White House’s cuts to research funding, while their counterparts in the healthcare and social assistance sector reported they were “seeing some vendors increasing their prices,” adding that “we are actively pushing back on those increases.”
Providers of public administration services said “our business is in a state of crises with uncertainty caused by both the ongoing trade war and the threats to federal funding of programs.”
The swirling uncertainty was seen encouraging the Federal Reserve to leave interest rates unchanged on Wednesday.
Suppliers’ delivery performance worsened last month, suggesting supply chains were starting to get strained. The ISM survey’s supplier deliveries index increased to 51.3 from 50.6 in the prior month. A reading above 50 indicates slower deliveries.
A lengthening in suppliers’ delivery times is normally associated with a strong economy, which would be a positive contribution to the PMI. Delivery times are, however, likely getting longer because of the rush to beat tariffs.
Some businesses reported “steel conduit lead times have increased due to factories unable to keep up with demand.”
With supply bottlenecks emerging, the survey’s measure of prices paid for services inputs jumped to 65.1. That was the highest reading since January 2023 and followed 60.9 in March.
Seventeen services industries reported a rise in prices, with the exception of arts, entertainment and recreation.
Most economists anticipate the tariff hit to inflation and employment could become evident by summer in the so-called hard economic data. Services sector employment continued to decline, though the pace slowed. The survey’s measure of services employment increased to 49.0 from 46.2 in March.
Companies attributed the rise to “backfilling many empty positions.” Others noted hiring freezes “due to uncertainty of government grants.”
“A stable labor market remains key for the economic outlook as the potential determining factor for sustaining consumers through whatever tariff-related disruptions are lurking in the months ahead,” said Tim Quinlan, a senior economist at Wells Fargo. “The labor market is holding up, but for how long remains a key question for growth this year.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)
