ISM Manufacturing & Services PMI – February 2025: Signals from the US Economy

Introduction

As financial markets seek direction in an environment marked by economic uncertainty, forward-looking indicators like the ISM Manufacturing PMI and the ISM Services PMI offer invaluable insights. The February 2025 data, recently released by the Institute for Supply Management (ISM), reveals a mixed economic picture, characterized by persistent inflationary pressures and diverging sectoral dynamics. In this article, we analyze the latest PMI data and explore what these numbers might indicate about the risk of recession or stagflation in the US economy.

ISM Manufacturing PMI – February 2025: A Fragile Return to Growth

The Manufacturing PMI registered 50.3% in February, signaling expansion for the second consecutive month, albeit at a slower pace compared to January (50.9%). This follows an extended period of 26 months of contraction, underscoring the fragile nature of the sector’s recovery.

Analysis

1. New Orders Collapse
The sharp decline in the New Orders Index (-6.5 points to 48.6) is particularly concerning. After briefly returning to expansion in January, new orders—an essential forward-looking component—have already fallen back into contraction territory. This reflects weakening demand, either due to softening domestic consumption or slowing global trade.
2. Employment Back into Contraction
The Employment Index slipped below the critical 50% threshold, falling to 47.6%. This suggests manufacturers are cutting jobs, a warning signal that the sector does not anticipate robust future demand.
3. Inflationary Pressures Surge
The Prices Index jumped sharply, rising by 7.5 points to 62.4%. This significant acceleration indicates that manufacturers continue to face higher input costs, either due to supply chain constraints, higher energy prices, or rising wages.
4. Persistent Backlog Contraction
The Backlog of Orders Index remains in contraction at 46.8%, although the pace has slowed. This indicates that manufacturers have been able to work through existing orders, but new business is not replacing it at a sufficient rate.

ISM Services PMI – February 2025: Services Sector Resilient but Facing Inflationary Heat

The Services PMI came in at 53.5%, marking eight consecutive months of expansion and an acceleration from January’s 52.8%. This reinforces the narrative that the services sector remains the primary pillar of growth for the US economy.

Analysis

1. Demand Holding Up
The New Orders Index climbed to 52.2%, suggesting that service providers continue to see solid demand despite tighter monetary conditions. This is crucial, as services account for the lion’s share of US GDP.
2. Employment Gains
Employment improved notably, rising 1.6 points to 53.9%. This signals continued hiring appetite in services, which contrasts sharply with the manufacturing sector’s job cuts.
3. Inflation Pressures Intensify
The Prices Index surged to 62.6%, indicating that service providers are not only facing higher costs but are likely passing them on to consumers. This is particularly concerning given that services inflation tends to be stickier than goods inflation.

Interpreting the Combined Picture: Recession or Stagflation Ahead?

Diverging Sectoral Health
• Manufacturing is flashing clear signs of stress, with falling orders, shrinking employment, and accelerating input prices.
• Services remain in expansion, driven by resilient demand and stable employment growth, but also face rising cost pressures.

Key Macro Implications

Rolling Recession Hypothesis
The US economy may be undergoing a sectoral recession, where manufacturing struggles while services hold up. This rolling recession dynamic has been visible in past cycles, where cyclical industries suffer first.
Stagflation Risk
With manufacturing weak, services inflation accelerating, and employment mixed, the risk of stagflation is mounting. This would present a nightmare scenario for the Federal Reserve, as it would be forced to juggle between supporting growth and taming inflation.
Fed Policy Dilemma
The combination of weakening manufacturing demand and stubborn services inflation could complicate monetary policy. Easing too early could reignite inflation, while remaining too restrictive could deepen the industrial slowdown.

Conclusions and Outlook

• Manufacturing: Vulnerable and deteriorating, with early signs that the January rebound was short-lived.
• Services: Resilient, but increasingly exposed to inflationary pressures that may soon dampen demand.
• Overall Economy: Balancing precariously between resilient consumer spending and industrial stagnation.

What to Watch Next

• March ISM Reports: Will services demand hold up? Will manufacturing orders rebound or deteriorate further?
• Fed Commentary: How does the Fed interpret this mixed data? Any sign of a policy pivot will be market-moving.
• Inflation Data: If services inflation continues to accelerate, expect hawkish signals from the Fed, even if growth slows.

In Summary

The February ISM data paints a complex picture: a fragile industrial rebound struggling to gain traction, juxtaposed with a resilient but increasingly inflation-hit services sector. This combination amplifies the risk of stagflation—weak growth paired with stubborn inflation—which is among the most challenging environments for policymakers and investors alike.