MNI INTERVIEW: Iran Shock Bites Resilient Services Growth-ISM

Middle East supply disruptions dampened growth in the U.S. services sector in March, but the industry is proving resilient and its expansion looks set to continue, Institute for Supply Management services chair Steve Miller told MNI.

The Iran shock appeared instantly in the ISM services survey and will continue to show up in the monthly reports, Miller said in an interview. "We saw that flow through immediately on concern around employment and prices paid," he said about the March survey. "Overall, it was a strong report. Nine of 10 sub-indexes are still in expansion territory."

The ISM services index declined 2.1 percentage points in March to 54.0, somewhat below expectations but reversing the February jump and above the 12-month average of 52.3. The composition of the report was mixed. 

"If we can't open the Strait of Hormuz, we're going to see numbers get close to 50. It'll trend toward 50. If we're able to open the Strait in the next month, by summertime we're going to see mid 50s again," Miller said of the headline PMI. "Right now, we're seeing the services economy maintain strength." (See: MNI INTERVIEW: Fed Will Hold Pat, Inflation To Spike-Benigno) 

PRICES SURGE

The new orders index increased 2.0 ppts to 60.6, pointing to some amount of stockpiling to get ahead of any Middle East impacts, Miller said. The business activity index sank 6.0 ppts to 53.9 and the employment index fell 6.6 percentage points to 45.2, the first contraction in four months. Readings above 50 indicate expansion.

The prices paid measure surged by almost 8 points to 70.7 in March, the highest reading since 2022 and the largest one-month rise in over 13 years. There were 20 commodities reported up in price, 0 reported down in price, and 7 reported in short supply. The majority of the increase was due to the situation in Iran, Miller said. 

"I expect to see employment come back," Miller said, suggesting it may be a one-month blip. "The number will be either at 50 or above 50 next month, but the prices index I'm expecting to go up several percentage points again," he said. 

"Energy costs are up so much that I don't think we'll see the delay in the costs or prices paid flowing through like we did with tariffs," he added. 

SUPPLY DISRUPTIONS

Miller said survey respondents continued to note tariff impacts in their commentary but Iran-related effects dominated, with some companies facing very specific supply disruptions and few alternative sourcing options. 

"There were comments of concern over what might happen in the future," he said. "It was dominated by prices going up in energy, fuel or gas, diesel, and then a few other commodities."