The U.S. services sector expanded at its fastest pace in more than three years in February, significantly outperforming economists’ expectations while showing signs that inflationary pressures are beginning to cool.
The Institute for Supply Management’s Services Purchasing Managers Index (PMI) rose sharply to 56.1 in February, climbing 2.3 points from January’s reading of 53.8. The result marked the strongest level since July 2022 and exceeded every forecast compiled in a Bloomberg survey of economists.
A PMI reading above 50 signals expansion, while a reading below that level indicates contraction. February’s jump reflects accelerating activity across a broad portion of the services economy, which accounts for the majority of U.S. economic output.
Steve Miller, chair of the ISM Services Business Survey Committee, said the report showed strong momentum across multiple components of the sector.
“The services sector is heating up,” Miller said, noting that business activity, new orders, and export demand all posted their strongest readings since 2024.
The report revealed widespread growth across service industries. Fourteen of the eighteen industries surveyed reported expansion in February, compared with eleven in January. Only retail trade, arts and entertainment, and transportation and warehousing recorded contraction during the month.
Demand surged particularly strongly. The New Orders Index rose 5.5 points to 58.6 percent, its highest level in more than a year. Roughly one-third of service providers reported an increase in new bookings, the largest share reporting rising demand in three years.
The Backlog of Orders Index also saw a dramatic increase, jumping 11.9 points to 55.9 percent. That figure represents the highest level since July 2022 and suggests companies are continuing to accumulate work faster than they can complete it.
Business Activity, which measures overall output across the sector, climbed to 59.9 percent. That marks the second-highest reading recorded since November 2022, further underscoring the strength of the sector’s expansion.
International demand also rebounded. The New Export Orders Index increased 12.2 points to 57.2 percent, returning to expansion territory after falling into contraction the previous month.
One notable development in the report was the simultaneous expansion across all ten of the ISM’s tracked indexes, a milestone not seen since March 2021.
Despite the surge in activity, inflation pressures within the services sector showed signs of easing. The Prices Index fell 3.6 points to 63.0 percent in February, its lowest level since March 2025 and notably below its 12-month average.
While a reading above 50 still indicates rising prices, the decline suggests the pace of cost increases is slowing even as demand remains strong.
Employment conditions also improved. The Services Employment Index rose 1.5 points to 51.8 percent, marking the third consecutive month of job growth and the strongest reading in roughly a year.
Separate labor market data reinforced the trend. Payroll processor ADP reported that private-sector employers added 63,000 jobs in February, the largest monthly increase since July.
Economists say the combination of strengthening employment and moderating inflation could support continued real wage growth for American workers.
The ISM report reflects economic conditions in February, prior to the U.S.-Israeli strikes on Iran, providing a snapshot of the economy’s underlying strength before any potential geopolitical impacts on energy prices.
Sal Guatieri, senior economist at BMO Capital Markets, told Bloomberg that the report suggests the economy is entering the year with solid momentum.
“The U.S. economy is off to a decent start,” Guatieri said, adding that its resilience should help it navigate potential disruptions unless energy prices rise dramatically.
Historically, ISM’s model translates a PMI reading of 56.1 into roughly 2.5 percent annualized real GDP growth. That pace suggests a steady expansion rather than an economic slowdown.
With services making up the largest portion of U.S. economic activity, February’s report points to broad-based economic strength, combining strong demand, steady hiring, and moderating price pressures.
