The U.S. services sector saw an uptick in growth in April, but a key indicator of business prices surged to its highest level in over two years, signaling rising inflationary pressures tied to tariffs.

According to the Institute for Supply Management (ISM) survey, services businesses expressed concern over the impact of President Donald Trump's tariffs on costs, alongside significant federal spending cuts as his administration pushes for a leaner government.

Trump's inconsistent tariff policies have introduced new levels of uncertainty, with some real estate, rental, and leasing companies in the ISM survey labeling the implementation of import duties as "frustratingly erratic." The risks of a recession have grown, with Trump recently announcing a 100% tariff on foreign-produced movies.

Scott Anderson, chief economist at BMO Capital Markets, noted that the negative effects on services and inflation are becoming increasingly evident. "Unless there’s a substantial change in U.S. tariffs and spending cuts, we expect the ISM services index to face downward pressure."

The ISM’s non-manufacturing purchasing managers’ index (PMI) rose to 51.6 in April, up from 50.8 in March. Economists had expected the PMI to drop to 50.2. A PMI above 50 signals growth in the services sector, which makes up more than two-thirds of the U.S. economy. The ISM links a PMI above 49 with overall economic expansion.

Some of the rise in the PMI was likely driven by businesses and households trying to anticipate tariff impacts, as the ISM survey revealed a jump in new orders, reaching 52.3 from 50.4 in March. Businesses also increased their inventories, with some explaining that they had bought products ahead of tariff hikes.

Steve Miller, chair of the ISM Services Business Survey Committee, noted that the overall results were improving, despite some challenges.

The survey, along with solid job growth in April, provided reassurance that the economy was not on the brink of a recession, even though GDP contracted in the first quarter, largely due to an influx of imports as businesses sought to avoid higher tariffs.

Matthew Martin, senior U.S. economist at Oxford Economics, stated, "The economy is expanding at a slow pace as we enter the second quarter. We expect the services sector to fare better than manufacturing, but it will still face challenges from higher prices and weaker consumer spending due to falling real disposable incomes."

On Wall Street, stocks were in the red, the dollar weakened against other currencies, and U.S. Treasury yields climbed.

Tariffs and Funding Cuts Cause Uncertainty

The survey showed growth in eleven industries, including accommodation, food services, wholesale trade, and utilities. However, finance, insurance, and public administration sectors experienced declines.

Businesses in agriculture, forestry, and fishing reported that tariffs were negatively affecting small businesses that source products from China. The trade war with China has seen tariffs on Chinese imports soar to 145%.

Educational services companies voiced concerns over research funding cuts, while healthcare and social assistance sectors reported rising prices from some suppliers, although they were actively pushing back on the hikes. Public administration providers said their business was in crisis, citing uncertainty from the ongoing trade war and the looming threat of cuts to federal program funding.

This uncertainty appears to have prompted the Federal Reserve to keep interest rates unchanged on Wednesday.

Supply Chain Strain and Rising Prices

Supply chain disruptions were becoming more apparent, as the ISM’s supplier deliveries index rose to 51.3 from 50.6, signaling slower deliveries. While longer delivery times typically indicate a strong economy, they are likely being driven by businesses rushing to beat tariff deadlines.

Some businesses noted extended lead times for steel conduit, as factories struggled to meet demand. Alongside this, the survey’s measure of prices paid for services inputs jumped to 65.1, the highest level since January 2023, up from 60.9 in March. Seventeen services industries reported price increases, excluding arts, entertainment, and recreation.

Economists are anticipating that the full impact of tariffs on inflation and employment will become more visible in upcoming months. The employment index in the services sector showed a slight increase to 49.0, up from 46.2 in March, as companies worked to fill vacant positions, despite some reporting hiring freezes due to uncertainty around government grants.

Tim Quinlan, senior economist at Wells Fargo, emphasized, "The stability of the labor market is crucial for sustaining consumer confidence amid potential tariff disruptions in the months ahead. While the labor market is holding steady, the big question is for how long."