US ISM Services PMI slowed in March, but the bigger signal came from inflation, with prices surging to the highest level since 2022 as the Iran-driven oil shock feeds through the economy. The headline index fell from 56.1 to 54.0, missing expectations of 55.0, pointing to moderating growth even as cost pressures intensify.
Under the hood, activity softened notably. Business Activity/Production dropped from 59.9 to 53.9, its lowest level since September 2025. Employment fell from 51.8 to 45.2, slipping back into contraction for the first time in four months. This suggests firms are becoming more cautious on hiring even as demand conditions remain mixed.
At the same time, demand has yet to roll over. New Orders rose from 58.6 to 60.6, indicating resilience in underlying consumption. However, the divergence between strong orders and weakening employment highlights growing uncertainty among businesses as cost pressures rise.
The inflation side was the standout. Prices jumped sharply from 63.0 to 70.7, the highest reading since October 2022, driven by rising fuel and transportation costs linked to the Middle East conflict. ISM noted that “the predominant commentary this month was about impacts and adjustments due to the conflict with Iran,” with companies reporting higher gas and diesel prices and building inventories to guard against disruptions.
Supply chains are also feeling the strain. Supplier Deliveries rose from 53.9 to 56.2, reflecting slower deliveries amid shipping disruptions and flight issues.
Overall, while the index still points to around 1.9% annualized GDP growth, the mix of cooling activity and surging prices reinforces a stagflation signal.
