US Services Sector PMI Plunges Into Contraction For First Time In 2 Years

After plunging in January, analysts expected US Services PMI survey to stabilize in February (and Manufacturing to continue modestly improving).

The analysts were half right and very wrong… While February’s preliminary Manufacturing print was 51.6 (highest since June 2024, up from 51.2 in Jan and better than the 51.4 exp), US Services PMI crashed to 49.7 (into contraction for the first time since Jan 2023), well below its 53.0 expectation…

Source: Bloomberg

This ‘Services down, Manufacturing up’ trend was also evident in European data this morning…

Cost pressures meanwhile intensified to the highest since last September. Service sector input cost inflation edged up to a four-month high, with companies citing tariff related price hikes from suppliers alongside rising food prices and upward wage pressures. But it was manufacturing which saw the steepest increase in costs, with raw material prices showing the largest monthly gain since October 2022, with the increase overwhelmingly blamed by purchasing managers on tariffs and related supplier-driven price hikes.

US Composite PMI plunged from ‘first’ in the world to almost ‘worst’…

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“The upbeat mood seen among US businesses at the start of the year has evaporated, replaced with a darkening picture of heightened uncertainty, stalling business activity and rising prices. 

“Optimism about the year ahead has slumped from the near-three-year highs seen at the turn of the year to one of the gloomiest since the pandemic. Companies report widespread concerns about the impact of federal government policies, ranging from spending cuts to tariffs and geopolitical developments. Sales are reportedly being hit by the uncertainty caused by the changing political landscape, and prices are rising amid tariff-related price hikes from suppliers. 

“Whereas the survey was indicating robust economic growth in excess of 2% late last year, the February survey signals a faltering of annualised GDP growth to just 0.6%.

“While overall inflationary pressures remained muted, this reflected a squeezing of margins in the services sector as companies sought to absorb cost increases in order to offer competitive prices amid weakened demand. A concern is the sharp, tariff-related, jump in manufacturing input prices, which will likely either put further upward pressure on inflation in the coming months or further squeeze profit margins among US companies.”

So it’s tariff fears – not actual tariff pressure – that is prompting panic?