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The March ISM Services PMI is one of those releases that refuses to give you a clean answer. On the surface it looks fine. A layer down, the picture gets more complicated.
The headline slipped to 54.0 from 56.1, below expectations but still the twenty-first straight month of expansion. The twelve-month average actually ticked up again. Read just the top line and you would conclude the services economy is moving along at a pace consistent with roughly two percent real GDP growth.
The internals are where it gets more interesting.
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Employment fell 6.6 points to 45.2, dropping into contraction for the first time in four months. Five industries reported hiring, six reported cuts. The committee chair called it a surprise, which is not language you usually see in these reports. For a services sector that had been holding up the broader labor picture, it is a number worth paying attention to.
Prices went the other way. The prices paid index jumped 7.7 points to 70.7, the biggest one-month move in nearly fourteen years and the highest reading since October 2022. Seventeen of eighteen industries reported paying more. Not a single commodity on the decreasing list. That matches what the manufacturing report showed.
The driver, based on the commentary, is mostly Iran. Transportation flagged higher jet fuel costs. Wholesale trade pointed at Strait of Hormuz threats and war-risk shipping surcharges. Construction noted force majeure from Middle Eastern suppliers, though operations are still running normally. The tariff story, which dominated these reports for most of the past year, has moved to the background.
Here is what makes the report harder to read. New orders rose to 60.6, the strongest reading since February 2023. Backlogs expanded for a second straight month. Fourteen industries reported order growth against one in decline. Demand is not the problem. Companies are getting the work but struggling with costs, lead times, and now hiring.
That is a specific kind of slowdown. Not a demand recession, more a supply-side squeeze with the labor market acting as the release valve. Finance and insurance explicitly said they are in cost-cutting mode, which suggests this is already underway in parts of the sector.
For the Fed, the report is not helpful. Prices argue for staying tight. Employment argues the other way. They will probably want another month of data before drawing conclusions, and so should the rest of us. One print does not make a trend. But if the labor softening holds in April and oil stays elevated, the next two ISM reports are worth watching closely.
