MNI INTERVIEW: Tariffs To Send Services Into Contraction-ISM

Policy changes out of Washington are likely to send the U.S. service sector into contraction next month for the first time in nearly a year after tariff uncertainty weighed heavily on activity through March, ISM Services survey chief Steve Miller told MNI Thursday. 

The ISM's topline indicator last month was the weakest since June, with a big pullback in new export orders, decrease in new orders and sharp fall in the employment index. The PMI decreased by 2.7 pp to 50.8, below expectations of 53.1. A reading above 50 percent indicates the services sector economy is generally expanding. 

Miller said he is expecting "more pain to come" in the services sector with a fall in the PMI index, but "the question is how much below 50."

"I definitely expect it to be below 50 next month," said Miller, noting the numbers around President Donald Trump's announcements on reciprocal tariffs Wednesday were "shocking." Miller estimated a services PMI in the range of 47 or 48 next month as plausible, adding he isn't expecting a plunge "to the floor" around 40. 

"Uncertainty will put the brakes on some of the buying, which by default will impact the new orders and and the business activity side for the PMI," he said.

EMPLOYMENT 

The employment index sank by 7.7 pp to 46.2 in March, the worst reading since 2023 and the largest single monthly drop since April 2020. 

"There were two camps, those that were impacted by or are being impacted by federal spending cuts and those that aren't. Those that are are canceling programs and reducing labor. Those that aren't are delaying hiring, going through additional reviews for backfilling positions, and that type of thing, but not layoffs and reductions in force," Miller said. 

Asked about his view of the outlook for the employment index, Miller said: "It'll get worse for the next two months. Beyond that, it depends how the actual tariffs versus projected tariffs impact input costs."

The new orders index fell 1.8 pp to 50.4 in March. Miller noted the February uptick in new orders were more indicative of tariff risk management than accelerating business growth. Miller said he is "'pretty sanguine" about the ISM prices index remaining around 60. (See: MNI POLICY: Fed Forced Into Hawkish Stance Despite Growth Risk)

TARIFFS

Even before Trump's announcement to send tariff rates skyward, there were "lots of concerns on potential tariff impacts, including 16 of the 18 industries within the services sector," Miller said. "From a risk mitigation standpoint, people are reducing the speed at which they're hiring and backfilling positions in order to manage their overall costs in view of what kind of input cost inflation they may see as a result of tariffs." 

Without the tariffs, Miller would have expected a continued return to slow growth with a PMI in the low 50s, he said. "To me, the drop of 7.7 pp in employment is more the issue. It goes to, there's still overall confidence in business. There's just a risk mitigation in terms of we need to manage costs."

Now with tariffs set to be higher than any point in the past century, there is a risk of losing demand from abroad, especially from countries most impacted by reciprocal rates, Miller noted.  

"What happens if Canada stops buying our goods? China stops buying goods? EU stops buying goods and services? The services industries are global businesses."