The services sector continued to expand in April, for the tenth month in a row, according to the Institute for Supply Management. That’s some better-than-expected economic data.
But many businesses in the services sector, especially small ones, say they’re concerned about tariffs. And some are already starting to see prices go up.
Overall, this was a good report card for the services sector.
“It does not show some of the economic weakness that we are all sort of looking for,” said Erin McLaughlin, a senior economist at The Conference Board.
She said new tariffs only went into effect in April, so it’s still early. It’ll likely take a bit before they affect the cost of services.
Stephen Juneau, senior U.S. economist at Bank of America Securities, said that’s because tariffs apply to goods.
“If you think about a hotel, right? You've got shampoo, soap, towels — all these things are goods that they use in kind of the cost of the hotel room,” he said. “So you're going to see some impact there, but it's just much more marginal relative to the labor cost.”
Even if hotels have to start paying more for all those little shampoos and soaps, that might not mean they have to hike the cost of a nightly stay — at least, not right away.
But Steve Miller, chair of the Services Business Survey Committee at the Institute for Supply Management, said some service businesses are more affected by tariffs than others.
“We saw over the last three months construction and utilities being two that have been significantly impacted,” he said.
And in the next few months, Gregory Daco, chief economist at EY, expects more will start to feel pressure from tariffs.
“And from the fact that we are still in what I've described as a supply-fragile environment, where minor shocks to supply conditions can lead to outsized inflationary consequences.” he said.
But in that environment, Daco said, it’ll help that the services sector is starting from a strong position. The job market is, too.
McLaughlin at The Conference Board said she’s hearing from businesses that after all the hiring challenges of the last few years, “They’re still very hesitant to lay off workers.”
And so as long as that unemployment rate stays stable, that will allow consumers to keep spending — which is good for the economy.
