WASHINGTON, March 4 (Reuters) – The U.S. services sector activity surged to more than a 3-1/2-year high in February amid strong demand, consistent with hopes for an acceleration in economic growth this quarter, but war in the Middle East poses a downside risk to the rosy picture.
The Institute for Supply Management said on Wednesday its nonmanufacturing purchasing managers index increased to 56.1 last month, the highest reading since July 2022, from 53.8 in January. Economists polled by Reuters had forecast the services PMI easing to 53.5.
A reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of U.S. economic activity. The PMI reinforced economists’ expectations for solid economic growth in the first quarter after gross domestic product slowed to a 1.4% annualized rate in the fourth quarter. The economy grew at a 4.4% pace in the July-September quarter.
The survey was, however, conducted before the U.S. and Israel attacked Iran on Saturday, with Tehran retaliating, and broadening a war that analysts said was rapidly descending into a wider regional conflict. The war has raised natural gas and oil prices, and caused volatility on global stock markets.
Economists at Goldman Sachs estimated that each $10 per barrel increase in oil prices would reduce 2026 fourth quarter over fourth quarter GDP growth by about 0.1 percentage point if prices stabilized at a higher level.
“This estimate reflects a drag on consumption from lower real disposable income, partially offset by higher energy capex,” they wrote in a note. “Uncertainty surrounding the length of the conflict and the recent decline in the sensitivity of energy investments to oil prices might limit this capex offset, pushing the GDP drag to about 0.13 percentage point.”
NEW ORDERS INCREASE STRONGLY
The ISM survey’s measure of new orders increased to 58.6 last month, the highest level since September 2024, from 53.1 in January. A gauge of export orders rebounded sharply as did backlog orders. Its gauge of prices paid by businesses for inputs eased to a still-high 63.0 from 66.6 in the prior month.
Economists at Wells Fargo estimated that a 10% sustained rise in oil prices would add roughly 0.3 percentage point to the year-over-year rate of headline consumer price inflation in the second and third quarter of this year.
The ISM said in its manufacturing sector report on Monday that there was a surge in prices at the factory gate. It attributed this to “increases in steel and aluminum prices that impact the entire value chain, as well as tariffs applied to many imported goods.”
The U.S. Supreme Court last month struck down President Donald Trump’s sweeping tariffs that he had pursued under a law meant for use in national emergencies. But Trump quickly imposed a 10% global tariff for 150 days to replace some of the emergency duties and then announced it would rise to 15%.
The ISM’s measure of supplier deliveries slipped to 53.9 from 54.2 in January. A reading above 50 percent indicates slower deliveries. Its gauge of services employment increased to 51.8 from 50.3 in January. It has not been a reliable labor market guide. The labor market has stabilized after hitting a speed bump last year, blamed by economists on tariffs.
Nonfarm payrolls likely increased by 59,000 jobs in February after accelerating by 130,000 in January, a Reuters survey of economists predicted. The unemployment rate is expected to have held steady at 4.3%.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama )
