MNI INTERVIEW: Tariffs To Lift Service Costs Further, ISM Says

Cost increases faced by U.S. service providers picked up in May to levels unseen since November 2022 and the trend has room to run with President Donald Trump raising aluminum and steel tariffs this week, Institute of Supply Management survey chief Steve Miller told MNI.

The ISM prices paid index climbed 3.6pp to 68.7 last month, the highest since pandemic-era supply chain disruptions when CPI stood at 7%, and is likely to rise further amid trade uncertainty, Miller said. The two-month increase in the services price index over April and May is the largest since early 2021, he said. 

"It has room to run. If the tariff uncertainty goes out another three months, causing supply constraints, we’ll see the same thing that we saw at the beginning of the pandemic," Miller said in an interview Wednesday. 

Trump's doubling of aluminum and steel tariffs to 50% will hit utilities and construction Miller said. "Much of what utilities order overseas are capital assets that take a long time to make," he said. Firms are getting hit with higher import duties on orders from a year or two ago, Miller said.

JOB GAINS RETURN

The supply-chain squeeze will worsen the longer uncertainty continues, he said. "We'll be in a real problem if we get into the fall without things getting resolved," he said. (See: MNI INTERVIEW: Trump Has Options To Keep Tariffs -Eissenstat)

Miller reckons the impact on U.S. inflation this time may be more limited as half of purchasing managers surveyed last month told ISM they won't pass through cost increases until they persist for six months. 

"What will constrain inflation is the lack of money supply," he said. "We're not sending thousand-dollar checks out to Americans." 

Price hikes will also be less than the previous cycle because the employment index returned to expansion territory after two months of contraction, Miller said. That's even as the headline index dipped below 50 and new orders moved into contraction territory for the first time in nearly a year. 

MAJORITY OF FIRMS GROWING

The May services PMI fell to 49.9 from a 12-month average of 52.3 and new orders fell 5.9pp to 46.4, but the employment index rose 1.7pp to 50.7. 

"There’s still confidence that the tariff impacts will be worked out," Miller said. "The commentary didn’t talk about massive expansion, but it did talk about replacing attrition as well as staffing to hit both seasonal activity as well as increases in project activity." 

Industries representing 57% of U.S. GDP say they're in expansion territory, higher than in April and March. Gains are led by accommodation and food services and entertainment and recreation. 

"The 49.9 headline number was primarily driven by reduction of expansion in the two industries rather than significant increase in contractionary activity," he said.