Navigating Tariff-Driven Volatility: Strategic Opportunities in the Resilient U.S. Services Sector

The U.S. economy in 2025 is defined by a stark divergence: while the manufacturing sector grapples with contraction, the services sector has emerged as a resilient counterpoint, defying macroeconomic headwinds. This dynamic creates a compelling contrarian investment opportunity, particularly in professional services, real estate, and retail trade, where rising new orders, business activity, and inventory growth signal structural adaptability amid tariff-driven uncertainty.

Services Sector Resilience: A Tale of Two PMIs

According to the August 2025 ISM® Services PMI report, the U.S. services sector expanded for the third consecutive month, with a reading of 52% [1]. This contrasts sharply with the manufacturing sector, which remained in contraction at 48.7% for the same period [1]. The Services PMI’s Business Activity Index (55%) and New Orders Index (56%) highlight robust demand, even as employment and supplier deliveries lag [1].

Tariffs, a persistent drag on manufacturing, have paradoxically spurred growth in services. For instance, professional services firms are capitalizing on businesses reevaluating U.S. expansion costs, driving M&A activity and technical advisory demand [1]. Similarly, real estate and rental sectors report record quarters, with one firm noting, “Revenue is increasing due to M&A activity and in spite of a slow housing market and increasing tariffs” [2].

Contrarian Positioning: Services Outperform Amid Manufacturing Weakness

The manufacturing sector’s struggles are well-documented: production indexes fell to 47.8 in August 2025, while new orders barely expanded at 51.4 [1]. This divergence underscores a critical investment insight: services industries are better positioned to absorb tariff shocks.

Data from the S&P Global Services PMI reinforces this trend, with the index hitting 54.5 in August—a 31st consecutive month of expansion [5]. Meanwhile, the S&P Global Manufacturing PMI, though improved at 53.0, reflects a fragile recovery where new orders grow but production falters [2]. This asymmetry suggests investors should overweight services sectors that thrive on cost-restructuring and digital transformation.

Sector Deep Dives: Professional Services, Real Estate, and Retail Trade

Professional Services: The Professional, Scientific & Technical Services industry reported growth in August, driven by companies navigating tariff-related cost pressures [1]. Firms specializing in supply chain optimization and compliance consulting are particularly well-positioned, as businesses seek to mitigate trade policy risks.

Real Estate: The Real Estate, Rental & Leasing sector defied a sluggish housing market, with one public company reporting its strongest quarter since 2020 [2]. Tariff-driven M&A activity and commercial property demand for nearshoring initiatives are key tailwinds.

Retail Trade: Retailers are adapting to value-driven consumer behavior, leveraging omnichannel strategies to offset margin pressures. The June 2025 Retail Trade Index returned to expansion, with Deloitte noting that personalization and affordability focus are critical to sustaining growth [3].

Challenges and Risks: Employment and Inflationary Pressures

Despite these positives, the services sector faces headwinds. Employment in services contracted for the third consecutive month in August (46.5%), reflecting labor market rigidity [1]. Additionally, the Prices Index remained elevated at 69.2%, signaling inflationary persistence tied to tariffs and input costs [1]. Investors must balance these risks against the sector’s growth momentum.

Conclusion: Strategic Allocation in a Fragmented Recovery

The U.S. services sector’s ability to outperform manufacturing amid tariff volatility highlights its strategic value for contrarian investors. By targeting subsectors with strong demand drivers—such as professional services, real estate, and retail trade—investors can capitalize on structural trends while hedging against broader economic slowdowns. As one industry respondent aptly noted, “The outlook continues to look incrementally positive” [2], even as macroeconomic noise persists.

Source:
[1] August 2025 ISM® Services PMI® Report [https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/services/august/]
[2] Services PMI® at 52%; August 2025 ISM® Services PMI Report [https://www.prnewswire.com/news-releases/services-pmi-at-52-august-2025-ism-services-pmi-report-302545705.html]
[3] 2025 US Retail Industry Outlook [https://www.deloitte.com/us/en/insights/industry/retail-distribution/retail-distribution-industry-outlook.html]
[5] S&P Global Services PMI: Growth Remains Positive In August [https://seekingalpha.com/article/4820138-s-p-global-services-pmi-growth-remains-positive-in-august]