US Services Sector Surges to 3.5-Year High, Powering Economic Growth

By Michelle Bell

TEMPE, Ariz. – March 04, 2026 – The United States services sector surged in February, expanding at its fastest pace in over three and a half years and signaling a powerful acceleration in the nation's primary economic engine. The Institute for Supply Management (ISM®) reported its Services PMI® jumped to 56.1 percent, a significant 2.3 percentage point increase from January and the highest reading since July 2022.

This marks the 20th consecutive month of growth for the services sector, which accounts for the vast majority of U.S. economic activity. In a sign of broad-based strength, all ten subindexes tracked by the report—including business activity, new orders, and employment—were in expansion territory for the first time since March 2021. The robust performance, which corresponds to an estimated 2.5 percent annualized increase in real GDP, paints a picture of a resilient and heating-up economy, even as underlying complexities persist.

The Engine of Expansion

The February report highlights a notable uptick across key growth indicators. The Business Activity Index climbed to 59.9 percent, while the New Orders Index saw a dramatic 5.5-point leap to 58.6 percent. These figures suggest that not only is current business brisk, but the pipeline for future activity is also strengthening significantly.

"The services sector is heating up, with the Business Activity, New Orders, and New Export Orders indexes at their highest levels since 2024," noted Steve Miller, Chair of the ISM® Services Business Survey Committee, in the official release. The data reveals a sector firing on multiple cylinders, with the Backlog of Orders Index returning to growth for the first time in a year and both New Export Orders and Imports rebounding into expansion territory.

This resurgence points to healthy demand, both domestically and internationally. Businesses are also rebuilding their stock, with the Inventories Index flipping from contraction to strong growth, registering 56.4 percent after a sharp increase. One respondent in the survey commented on the build-up, stating, "After maintaining and reducing some inventories at the end of the year, inventory levels are starting to build up in preparation of the activity for the next three quarters."

A Tale of Two Economies

While the services sector provides a powerful tailwind, its momentum contrasts sharply with the more tepid recovery in the manufacturing sector. The latest ISM® Manufacturing PMI®, while still in expansion at 52.4 percent, slipped slightly from January and highlighted a stark divergence in inflationary pressures.

While the Services Prices Index moderated to 63.0 percent—its lowest reading in 11 months—the Manufacturing Prices Index surged over 11 points to 70.5 percent, its highest since June 2022. This suggests that factories are bearing the brunt of rising commodity costs and tariff impacts, while service-based companies are experiencing a slight reprieve in the rate of price increases, even as costs continue to climb.

The labor market tells a similar story of divergence. The Services Employment Index accelerated to 51.8 percent, indicating a third straight month of hiring growth. Conversely, manufacturing employment remained in contraction territory at 48.8 percent. This creates a "two-speed" economic landscape where robust service industry hiring is keeping the overall labor market tight, while the goods-producing sector continues to struggle with its workforce.

A Patchwork of Industry Performance

Beneath the headline numbers, the report reveals a patchwork of performance across different industries. Fourteen sectors reported growth, led by strong gains in Mining, Information, and Real Estate, Rental & Leasing. Commentary from survey respondents provides a window into these trends, with one from the mining sector citing that "Tariff volatility and shifting bilateral trade agreements are materially impacting our purchasing operations," despite the industry's growth. In the information sector, another respondent noted, "Pulling in new purchases that were scheduled later in the year due to rising costs from AI data center expansion," pointing to the tech boom's ripple effects.

However, not all sectors shared in the expansion. Three industries reported contraction: Retail Trade; Arts, Entertainment & Recreation; and Transportation & Warehousing. These struggles highlight specific pressure points within the economy. A respondent from the retail sector cited supply chain disruptions, noting, "Due to random-access memory shortages, we are seeing increased cost and lead times from key technology providers."

Meanwhile, the logistics network is feeling the strain of increased economic activity. A respondent in the Transportation & Warehousing industry reported that "Transportation/truck capacity has been extremely tight, causing rates to spike 30 percent to 40 percent," attributing the squeeze to a combination of weather, regulatory changes, and a general increase in commerce.

Navigating Persistent Headwinds

Despite the strong growth, the services sector is not without its challenges. Inflation remains a persistent concern. Even with the moderation in the Services Prices Index, the metric has remained above 60 percent for 15 straight months, indicating sustained cost pressures. For the first time since February 2025, gasoline was noted as a commodity up in price, joining a list that includes copper, labor, and computer components.

Supplier deliveries continue to slow, a double-edged sword that indicates strong demand but also creates logistical hurdles for businesses. The Supplier Deliveries Index registered 53.9 percent, its 15th consecutive month indicating slower performance.

Businesses also continue to grapple with trade policy uncertainty. While Miller noted that companies seem to have developed capabilities to manage tariff policies, individual comments reveal ongoing anxiety. A respondent from the Real Estate, Rental & Leasing industry stated, "The business climate remains solid overall, but significant unknown risks from further potential tariff actions by the U.S. government are dampening business investment." This sentiment underscores the delicate balance businesses must strike: capitalizing on strong current demand while navigating a landscape of lingering inflation, supply chain bottlenecks, and geopolitical uncertainty.