MW U.S. economy is still growing, ISM says, but Trump tariffs generate 'great uncertainty' and more inflation

By Jeffry Bartash

ISM services index climbs to 53.5% in February

The numbers: The large service side of the U.S. economy that employs most Americans grew faster in February, but businesses said they were nervous about the Trump tariffs and were already facing higher costs.

The service index compiled by the Institute for Supply Management rose to 53.5% in February from 52.8% in the prior month. More than 80% of Americans are employed by service-oriented businesses in areas such as retail, health care and travel.

Any reading above 50% signals expansion.

The good headline number masked growing uncertainty among senior executives as they tried to gauge the effects of the president's tariffs and government spending cuts on their businesses.

"Anxiety continues; however, over the potential impact of tariffs. Some respondents indicated that federal spending cuts are having negative impacts on their business forecasts," said Steve Miller, chairman of the survey.

The chief executives of Target $(TGT)$and Best Buy $(BBY)$ say the steep new tariffs imposed on China, Canada and Mexico could led to higher prices for consumer goods and slow the economy.

The prices-paid index, a measure of inflation, rose again to 62.6%. The index has been above 60% for the third month in a row, the first time that's happened in two years.

Economists polled by the Wall Street Journal had forecast a reading of 52.9% in the overall ISM index.

Key details:

-- The new-orders index rose almost 1 point to 52.2%.

-- The employment barometer increased 1.6 points to 53.9% to mark the highest level since the end of 2021.

Big picture: The large service side of the economy is the locomotive of U.S. growth and it's less affected by tariffs and foreign competition more generally.

Still, the tariffs are bound to raise costs for some businesses such as retailers and construction companies and create a headwind for the broader U.S. economy.

Looking ahead: "Implementation of tariffs will have a significant cost impact to our projects," one construction executive told ISM. "We are also seeing U.S. prices already rise in anticipation."

"Business seemed to pop after the election, but uncertainty after the election seemed to take the 'wind out of our sales,' with uncertainty again increasing," an executive at a professional firm said.

Market reaction: The Dow Jones Industrial Average and S&P 500 were mixed in Wednesday trading. Stocks have fallen sharply in the past weeks in response to the tariffs.

-Jeffry Bartash

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March 05, 2025 10:17 ET (15:17 GMT)

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