A general view of the tobacco aisle of a 7-Eleven store in Manhattan, New York City
The activity in the United States services sector reached its highest level in over three and a half years in February, thanks to strong demand, boosting hopes of an acceleration in economic growth this quarter.
However, the war in the Middle East poses a risk to this optimistic outlook.
The Institute for Supply Management announced on Wednesday that its non-manufacturing sector purchasing managers’ index rose to 56.1 last month, its highest level since July 2022, from 53.8 in January. Economists surveyed by Reuters had expected the services PMI to decline to 53.5.
An index above 50 indicates growth in the services sector, which represents over two-thirds of the US economic activity.
The PMI has reinforced economists’ forecasts for a strong economic growth in the first quarter, following a slowdown in GDP growth to an annualized rate of 1.4% in the fourth quarter. The economy grew at a rate of 4.4% in the July-September quarter.
The survey was conducted before the United States and Israel attacked Iran on Saturday, leading to retaliation from Tehran and escalating a war that analysts warn could quickly degenerate into a wider regional conflict. The war has driven up prices of natural gas and oil and caused volatility in global stock markets.
Economists at Goldman Sachs estimated that every $10 increase in oil prices would reduce GDP growth by about 0.1 percentage point compared to the fourth quarter of 2026, if prices stabilized at a higher level.
“This estimate reflects a brake on consumption from the decline in real disposable income, partially offset by increased investment spending in the energy sector,” they wrote in a note.
“The uncertainty surrounding the duration of the conflict and the recent decline in the sensitivity of energy investment to oil prices could limit this investment spending offset, pushing the brake on GDP to approximately 0.13 percentage point.”
STRONG RISE IN NEW ORDERS
The ISM index for new orders reached 58.6 last month, its highest level since September 2024, up from 53.1 in January.
The export orders index saw a strong rebound, as did the backlog of orders index. The index of prices paid by firms for their inputs modestly declined, from 66.6 the previous month to 63.0, a level that remains high.
Economists at Wells Fargo estimated that a sustained 10% increase in oil prices would add about 0.3 percentage point to the annual inflation rate for consumer prices in the second and third quarters of this year.
The ISM reported on Monday in its manufacturing sector report that there was a sharp increase in prices at factory gates. It attributed this increase to “the rise in steel and aluminum prices impacting the entire value chain, as well as tariffs applied to many imported products.”
The ISM index measuring supplier deliveries fell to 53.9, down from 54.2 in January. An index above 50% indicates slowing deliveries.
Its employment index in the services sector rose to 51.8, up from 50.3 in January. This is not a reliable labor market indicator. The labor market stabilized after a slowdown last year, attributed by economists to tariff measures.
According to a Reuters survey of economists, nonfarm payrolls likely increased by 59,000 in February, following an acceleration of 130,000 in January. The unemployment rate is expected to remain at 4.3%.
(Reporting by Lucia Mutikan, written by Mara Vîlcu, edited by Benoit Van Overstraeten and Sophie Louet)
