U.S. services PMI weakened in March as Iran war disruptions lifted costs and hurt employment, while markets rallied on softer data amid hopes the Fed may take a dovish stance.
The service sector, which accounts for more than 75% of the U.S. GDP, saw a hit from the U.S.-Iran war, with prices, employment as well as supplier deliveries worsening in March.
The E-Mini S&P 500 futures contract added to its gains and bond prices rose as traders factored in a dovish rate outlook following a smaller-than-expected service sector expansion.
Crunching the Numbers: The Institute for Supply Management’s (ISM) services purchasing managers’ index (PMI) for March fell to 53.9 from 56.1 in February. Economists had braced for a more modest drop to 54.8.
Service Sector PMI
Source: ISM
Chair of the ISM Services Business Survey Committee Steve Miller said, “Thirteen industries reported growth in March, one fewer than in February, and the number reporting contraction remained at three.”
“The March Services PMI reading of 54 percent is 1.7 percentage points above the 12-month average of 52.3 percent. This average is an uptick of 0.3 percentage points over February’s 12-month average of 52 percent.”
Miller noted that the predominant commentary this month was about impacts and adjustments due to the conflict with Iran and the expected flow through of higher oil prices at some point. The U.S., along with Israel, engaged with Iran, disrupting oil shipments through the Strait of Hormuz, a major chokepoint. The conflict has now entered its 38th day.
The ICE-traded Brent crude futures have climbed 50% from pre-conflict levels in a span of a little over a month.
Brent Crude Futures (Post-Iran War Performance)
Source: TradingView
How did other indices fare relative to month-ago levels? Six of the 10 subindexes decreased month-over-month.
- The Business Activity Index: 53.9 Vs. 59.9; the lowest since September 2025)
- The New Orders Index: 60.6 Vs. 58.6
- The Employment Index: 45.2 Vs. 51; the first contraction in four months
- The Supplier Deliveries Index: 56.2 Vs. 53.9; the latest reading suggesting expansion for the 16th straight month, indicating slower supplier delivery performance
- The Prices Index: 70.7 Vs 63; the highest since October 2022)
- The Inventories Index: 54.8 Vs 56.4
- The New Export Orders: 50.7 Vs. 57.2
- The New Import Orders: 55.2 Vs 51.8
S&P Global’s U.S. service sector March survey results released Friday showed a “fractional” contraction in activity for the first time since January 2023. The final service sector PMI came in at 49.9 in March, down from February’s 51.7. The panelists blamed the deterioration in activity on the impact of the war in the Middle East.
“The PMI survey data show the U.S. economy buckling under the strain of rising prices and intensifying uncertainty, as the war in the Middle East exacerbates existing concerns regarding other policy decisions in recent months, notably with respect to tariffs,” said S&P Global Chief Business Economist Chris Williamson.
Pockets of Strength: The ISM noted continuing strength in business activity, new orders and backlog of orders. Export and import activity has expanded for two months in a row for the first time since September and October 2024.
Read-Across for Rates: While the service sector loses momentum amid the Iran war, the manufacturing sector has held up. The ISM manufacturing PMI released last week showed 0.3-point increase to 52.7, signaling expansion for the 17th month in a row.
The Federal Reserve’s rate-setting committee now has a tough task before it as it takes stock of the slight loss in economic momentum. The employment market has shown resilience, with the March non-farm payroll report showing blockbuster job gains.
The next Federal Open Market Committee (FOMC) meeting is scheduled for April 28-29. The Fed staffers would watch the developments on the Iran war and the extent of their impact on the economy, while also keeping a tab on a few key first-tier reports, including the February personal consumption expenditure (PCE) index, and the March consumer prices report, both of which are due this week.
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