MNI INTERVIEW: US Services Surged Before Middle East War - ISM

The U.S. service economy picked up steam in the early part of 2026, a jump that will likely be extended as long as the higher energy costs, uncertainty, and geopolitical risk linked to U.S. and Israeli attacks on Iran do not last too long, Institute for Supply Management services chair Steve Miller told MNI.

"This was definitely a good month, prior to last week," Miller said, acknowledging a blurred outlook due to the start of a war in the Middle East. The February report saw the highest reading since July 2022. 

The February ISM services survey jumped 2.3ppts to 56.1, well above expectations. The ISM improvement came as the new order index increased 5.5ppts to 58.6 and new export orders surged 12.2ppts to 57.2. The employment index rose 1.5ppts to 51.8 and the prices index fell 3.6ppts to 63.0, the lowest reading in 11 months. 

Miller said the better-than-expected February report doesn't cause him to readjust his view of the outlook. "I think we'll probably see something in the middle 53 to 56 range because we're going to see new orders drop some and supplier deliveries go up, in terms of a number with the shipping impacts of the war."

IRAN WAR

If the Middle East conflicts lasts for months then the PMI will sag, possibly into contraction, Miller said. 

"If the conflict is extended and and we're not able to keep shipping routes safe or production running for oil, then we'll start seeing that impact the services sector significantly, high 40s and low 50s," he said. "Kind of bouncing around there, but that doesn't happen until June or July."

A build back in inventories and move higher in order backlogs across the sector are additional signs that demand continues to ramp back up. 

Miller was surprised by the February report, which also showed new export orders index increasing to their highest level since July 2024. 

"I don't know the reason behind them. Maybe the weaker dollar. Maybe the finalization of tariff deals opened things up that people were putting on hold. I'm not sure but it was pretty pretty significant. A 12.2 percentage point increase on export orders. I think that probably drove the increase in the new orders in total, and that seems to be what drove the overall number most definitely." 

EASING COST PRESSURES

The ISM report noted that respondents say that tariff impacts have stabilized and are now embedded in supply chain costs. "Although there were several comments on tariff uncertainty regarding the U.S. Supreme Court decision, there was no alarm regarding supply chain performance, suggesting that services companies have developed capabilities to routinely address shifts in tariff policies.”

Signs of easing cost pressures may also dampen the need for more Federal Reserve rate cuts, Miller said, anticipating a quarter point cut this year. He acknowledged a complicated outlook as the ISM manufacturing report this week showed a surge in its prices index. (See: MNI POLICY: Fed Embraces Pause As Downside Labor Risks Abate) 

Respondents in the ISM survey are mostly silent about calling for rate cuts, except the construction industry, Miller said.