U.S. Service Sector PMI Rises 1.4% in April, Driven by Tariff-Induced Price Surge

The U.S. service sector showed signs of recovery in April, with an increase in orders driving growth. This surge in demand led to a rise in the index for prices paid by businesses for materials and services to its highest level in over two years, indicating that tariffs are contributing to growing inflationary pressures.

The Institute for Supply Management (ISM) reported that its non-manufacturing Purchasing Managers' Index (PMI) rose to 51.6 in April, up from 50.8 in March. This increase surpassed the expected 50.2, signaling a faster pace of growth in new orders and inventory levels. The rise in prices paid by businesses for materials and services underscores the increasing cost pressures faced by the service sector.

The acceleration in new orders and inventory levels, coupled with the rise in prices, suggests that businesses are preparing for potential disruptions in supply chains due to tariffs. The increase in the PMI index also reflects the resilience of the U.S. service sector, which has been a key driver of economic growth in recent years. The rise in prices paid by businesses for materials and services is a concern for policymakers, as it could lead to higher inflation and potentially impact consumer spending.

The data also suggests that businesses are taking steps to mitigate the impact of tariffs, such as increasing inventory levels and accelerating orders. The increase in the PMI index is a positive sign for the U.S. economy, as it indicates that the service sector is continuing to grow despite the challenges posed by tariffs. However, the rise in prices paid by businesses for materials and services is a reminder of the ongoing inflationary pressures facing the economy.

The data also highlights the need for policymakers to monitor the impact of tariffs on the economy and take steps to mitigate any potential negative effects. The increase in the PMI index, along with strong employment growth in April, indicates that the economy is not on the brink of a recession, despite the contraction in GDP in the first quarter. The contraction in GDP was due to businesses importing large quantities of goods to avoid higher prices resulting from tariffs imposed by the Trump administration.

Businesses and households rushing to complete purchases before the implementation of tariffs likely contributed to the rise in the service sector PMI in March. The ISM survey showed that the new orders index rose from 50.4 in March to 52.3 in April, and inventory levels also increased. The deterioration in supplier delivery performance indicates that supply chains may be starting to tighten. The ISM survey's supplier delivery index rose from 50.6 in March to 51.3 in April, with readings above 50 indicating slower delivery speeds.

Longer supplier delivery times are typically associated with strong economic conditions, which is a positive factor for the PMI. However, the lengthening of delivery times is likely due to businesses rushing to complete purchases before the implementation of tariffs. As supply bottlenecks emerge, the prices paid for services in this survey jumped to 65.1, the highest reading since January 2023, up from 60.9 in March.

Most economists expect the impact of tariffs on inflation and employment to become apparent in the so-called hard economic data this summer. Employment in the service sector continues to decline, but the rate of decline has slowed. The survey showed that the employment index for the service sector rose from 46.2 in March to 49.0 in April.