Quick Overview

  • The Institute for Supply Management (ISM) said Wednesday that U.S. service-sector businesses expanded in January for a second straight month at the fastest pace since October 2024. The ISM services composite index, based on a monthly survey, has now risen for 19 consecutive months.
  • Among the ISM index components, business activity accelerated, while new orders and employment continued to increase but at a slower pace than in December. Steve Miller, chair of the ISM Services Business Survey Committee, noted that the prices index was above its 12-month average, and more respondents mentioned tariff impacts and uncertainty, possibly related to annual contract renewals and geopolitical tensions.
  • "These are positive signs of continued expansion," Miller said in a statement. However, he also cautioned that price pressures still warrant attention.

In-Depth Analysis

The rise in the services index echoes the increase in the ISM manufacturing Purchasing Managers' Index (PMI). The latter rose in January to its highest level since August 2022, partly driven by new orders expanding for the first time since August, data ISM released on Tuesday showed.

Susan Spence, chair of the ISM Manufacturing Business Survey Committee, said the manufacturing new orders, backlog of orders, and new export orders indexes all pointed to solid demand. But she added: "While these are positive signals for the start of the year, panel comments indicate that January is a month for reordering after the holidays, and some purchases appear to have been pulled forward in anticipation of price increases stemming from ongoing tariff concerns."

In recent weeks, Federal Reserve officials have emphasized the economy's resilience amid the highest tariffs since the 1930s. Richmond Fed President Tom Barkin said Tuesday: "Once again, we are seeing remarkable resilience in the economy." He cited solid consumer spending, 4.4% GDP growth in the third quarter, and the unemployment rate falling to 4.4% in December.

"This resilience is underpinned by strong underlying momentum," Barkin said in a speech. "With inflation coming down, real wages are rising. Asset values continue to grow, and corporate earnings remain strong. In this environment, it is hard to imagine consumers and businesses stepping to the sidelines."

The Atlanta Fed estimated Monday that the economy may have grown at a 4.2% annualized rate in the fourth quarter. Fed Chair Jerome Powell also highlighted the U.S. economy's surprising vitality on January 28.

"The economy has surprised us again with its strength, and this is not the first time," Powell said. He cited strong investment in AI data center construction as one driving factor. He also said "overall consumer spending data is good," even though some surveys show households are pessimistic about the economy, employment, and prices.

Powell's remarks came after policymakers, with two dissenting votes, decided to hold the main interest rate steady in the 3.5% to 3.75% range, while noting signs of stable growth and a stabilizing unemployment rate. Policymakers warned that inflation remains above the 2% target, but they did not express the same degree of concern about weak job growth as they did when cutting rates three consecutive times in the final three months of last year.

Powell expects the inflationary impact of import tariffs to begin fading around mid-2026. However, Barkin said tariffs are currently central to executive discussions about the magnitude of price adjustments in early 2026. "In boardrooms across the country, sales and finance teams are debating how aggressively to raise prices, for example, in the context of tariffs raising input costs. Sales doesn't want to pass those costs along for fear of losing volume; finance doesn't want to absorb them for fear of margin compression," he said.

Barkin added: "Inflation data becomes a key factor in this debate—when inflation is high, it helps finance raise prices; when inflation is not high, it helps sales price cautiously."