The S&P Global US Services PMI dropped to 49.7 in February 2025 from 52.9 in the previous month, falling sharply below market expectations of 53 and signaling the first contraction in the services sector in more than two years.
US services sector unexpectedly contracts
The decline reflected a near stagnation in new orders, as firms reported worsening demand conditions due to growing political uncertainty, particularly concerns over spending cuts and pro-inflationary policies introduced by the new presidential administration.
The deterioration in business conditions also weighed on sentiment, with the survey’s optimism index falling to its lowest level in five months. Companies cited heightened worries over tariffs, unfavorable geopolitical developments, and economic policy shifts, leading to increased caution in investment and hiring decisions. As a result, weaker capacity demand led firms to cut jobs after two consecutive months of net hiring, pointing to a more cautious approach toward workforce expansion.
Input cost inflation accelerated
On the pricing front, input cost inflation accelerated to a four-month high, driven by businesses front-loading purchases ahead of anticipated tariff hikes and rising costs for food and wages. Despite these cost pressures, heightened competition in the sector forced firms to lower their selling prices to remain competitive, highlighting ongoing challenges in maintaining profit margins.
Weakening services sector
Overall, the latest PMI data suggest a weakening services sector amid policy uncertainty and cost pressures, adding to concerns about the broader economic outlook. Businesses will be closely watching upcoming fiscal and trade policy decisions, which could influence demand recovery and pricing strategies in the months ahead.
