- Services sector PMI holds steady at 53.8 in January
- New order growth slows as exports slump
- Tariffs, uncertainty dominate commentary from businesses
- Private payrolls increase 22,000 in January, well below expectations
WASHINGTON, Feb 4 (Reuters) - The U.S. services sector held steady in January, with businesses increasingly worried about supply constraints tied to a data center construction boom powering artificial intelligence.
The Institute for Supply Management survey on Wednesday also showed tariffs on imports and uncertainty remained concerns for many firms, which the ISM said was "potentially the result of annual contract renewals and geopolitical tensions."
President Donald Trump last month threatened additional tariffs on European allies for rebuffing his demands for the U.S. to buy Greenland, before abruptly backing down. Trump, who has imposed sweeping tariffs on trade partners, also said in January he was putting Venezuela under temporary American control after the U.S. captured President Nicolas Maduro.
"Despite a more muted start to the year, we expect service sector growth to accelerate over 2026 as uncertainty fades and economic activity picks up," said Ben Ayers, senior economist at Nationwide. "The service sector stands ready to expand further if enhanced tax incentives and fiscal stimulus lift consumer demand and investment activity into a faster gear."
The ISM said its nonmanufacturing purchasing managers index was unchanged at 53.8 last month amid a moderation in new order growth because of a slump in exports. Economists polled by Reuters had forecast the services PMI easing to 53.5.
The services sector accounts for more than two-thirds of U.S. economic activity. The PMI suggested a steady pace of economic activity at the start of the first quarter. Growth this year is expected to be supported by tax cuts.
Eleven services industries, including utilities, construction, retail trade as well as public administration, accommodation and food services reported expansion. Among the five industries contracting were wholesale trade and transportation and warehousing.
Comments from businesses were mixed. Some accommodation and food services providers said "the uncertainty of U.S. tariff policies continues to affect our purchasing," adding that "the proliferation of AI is affecting how we purchase services."
Some providers of healthcare and social assistance said they expected AI-related data center construction to "cause constraints in the IT market and availability" in the coming months. Utilities providers reported that "data centers are causing large spikes in requirements," adding that "suppliers are challenged by capacity and tariffs." They viewed the current situation as "exciting and challenging" for the industry.
But the construction industry welcomed the proliferation of data centers, saying they expected "significant business growth in 2026." Elsewhere, retailers reported business in January was "even better," after strong holiday sales across most units, noting that "consumers are still buying discretionary goods."
For finance and insurance firms, business had "stayed pretty consistent" while transportation and warehousing companies experienced a "typical slow start."
Stocks on Wall Street were mixed. The dollar rose against a basket of currencies. U.S. Treasury yields edged higher.
WILL SERVICES PRICE INCREASES STICK?
The ISM survey's measure of prices paid by businesses for inputs increased to 66.6 amid signs of supply strains, from 65.1 in December. Its gauge of supplier deliveries increased to 54.2, the highest level since October 2024, from 51.8 in December. A reading above 50 indicates slower deliveries.
"Whether pricing increases will stick or expand needs to be closely watched," said Steve Miller, chair of the ISM Services Business Survey Committee.
Cooling services inflation has helped to offset some of the pass-through from tariffs. Federal Reserve Chair Jerome Powell said last week tariffs were likely to be "a one-time price increase." The U.S. central bank last week left its benchmark overnight interest rate in the 3.50%-3.75% range.
The survey's new orders gauge dropped to 53.1 from 56.5 in December. A measure of export orders contracted to 45.0, the lowest level since March 2023, from 54.2 in the prior month. Some respondents in the ISM's January manufacturing survey published on Monday reported that "U.S. geopolitical tensions are fueling 'anti-American' buyer sentiment."
Growth in services employment slowed last month. The ISM said comments from companies included retirements and hiring freezes. The survey's measure of services employment slipped to 50.3 from 51.7 in December.
Slower job growth was evident in the ADP's national employment report showing private payrolls increased by 22,000 jobs in January after rising 37,000 in December. Economists had forecast private employment advancing by 48,000 jobs.
Annual revisions, however, showed a steady pace of job gains rather than the previously reported weakness and aligned with Powell's assessment that "labor market indicators suggest that conditions may be stabilizing after a period of gradual softening."
The Labor Department's employment report for January, which was due on Friday, will be released next Wednesday after being delayed by the partial shutdown of the government that ended on Tuesday. Economists expect that report to show nonfarm payrolls increased by about 70,000 jobs last month after rising 50,000 in December. The unemployment rate is forecast to be unchanged at 4.4%.
"American companies are reluctant to hire right now," said Heather Long, chief economist at Navy Federal Credit Union. "They are still cautious given tariffs and uncertainty, and many firms are investing heavily in AI, leaving less money to expand headcount."
Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci
Source: Reuters