ISM Services PMI Beats Forecast; S&P 500 Rises as Fed Remains Cautious

The US non-manufacturing sector showed an unexpected uptick in April, as the latest ISM Services PMI came in stronger than anticipated. The index, which measures business activity in the American services sector, rose to 51.6 – surpassing the consensus forecast of 50.2 and edging above March’s 50.8. Any reading above 50 indicates expansion, and April’s figure marks the tenth consecutive month of growth for US services. This resilience in the service economy, which forms the lion’s share of US GDP, suggests fundamental strength persisting despite ongoing external uncertainties.

Equity markets greeted the news with cautious optimism. The S&P 500 index extended its recent gains on the back of the upbeat ISM data, as investors took comfort in evidence that the US market can continue expanding without veering into recession territory. A pickup in new orders and a stabilisation in employment fuelled hopes that consumer demand and corporate earnings in service industries will remain robust. However, the report also sounded a note of caution: a sharp increase in prices paid by service providers underscored that inflation pressures remain alive. This aspect of the report has kept the Federal Reserve (Fed) and its peers vigilant, tempering market euphoria with the reminder that monetary policy may need to stay tight for longer.

Key ISM Indicators for April 2025

Below are the key indicators from the April ISM report for the US services (non-manufacturing) sector:

Note: Values above 50 denote expansion, while below 50 signal contraction.

Demand and Activity: New Orders Up, Activity Growth Moderates

April’s survey revealed a mixed but generally positive picture across its subcomponents. The New Orders Index climbed to 52.3 (from 50.4 in March), reaching a four-month high and indicating that demand for services is rebounding after a spring lull. This uptick in new business is a favourable leading indicator for the sector, suggesting firms are seeing improving order books that could translate into stronger revenues in the coming months.

At the same time, the Business Activity Index – a measure of current output in the services sector – eased to 53.7 from the previous month’s 55.9. While this indicates the pace of activity growth cooled slightly, the level remains solidly in expansion territory. In effect, service providers are still increasing their output, but perhaps at a more measured rate. Some moderation in activity could reflect a degree of caution among businesses facing lingering headwinds such as international trade tensions or higher operating costs. Nevertheless, a reading in the mid-50s is historically consistent with healthy growth, underscoring that the sector’s momentum has not been derailed.

The Employment Index in April improved to 49.0 compared to March’s 46.2, nearly crossing into expansion. Although a value below 50 means the service industries collectively shed jobs on net, the much higher reading versus the prior month indicates that labour conditions are stabilising. After a sharp slowdown in hiring in March, service firms appear to be resuming recruitment, albeit tentatively. This partial rebound suggests that while companies remain careful about payroll expansion amid economic uncertainties and rising wage costs, the worst of the service-sector job pullback might be over for now. Any return of the employment index to above 50 in coming months would signal net job growth in services – a development that would further bolster confidence in the economic outlook.

Price Pressures Highlight Inflation Risk

One of the most striking aspects of the ISM report was the surge in the Prices Index. In April, prices paid by service organisations jumped to 65.1 from 60.9, marking the highest level in roughly two years. This steep rise indicates that cost pressures — from wages to raw materials and supplier pricing — have intensified. Respondents to the ISM survey cited higher input costs and ongoing supply constraints (including import tariffs on certain goods) as factors driving up prices. Such persistent price pressures in the services sector are notable because service inflation tends to be sticky, meaning it can sustain elevated levels once established.

For policymakers, the renewed acceleration in service-sector prices is a warning sign. Recent months have seen headline inflation cool modestly in official data, but the ISM’s price gauge suggests underlying inflationary momentum remains strong in parts of the economy. If businesses continue to face elevated costs, they may eventually pass these on to consumers, potentially slowing demand or eroding purchasing power. On the other hand, some industries reported relief on the cost front – for example, the accommodation and food services category was noted as an outlier that saw some price declines – indicating that inflation dynamics can vary across different service industries.

Stock Market Reaction and S&P 500 Outlook

US stocks largely rose on the ISM release, reflecting relief that the economic expansion is intact. The S&P 500 climbed in the days following the report, adding to a rally that had been underway as investors interpreted the data as supportive of a “soft landing” scenario. The resilience of the services sector – which accounts for the bulk of the US economy – is a key underpinning for corporate earnings and equity valuations. With new orders on the rise and employment trending toward growth, the outlook for consumer spending and service-related companies appears cautiously optimistic, which in turn buoys sentiment for stock investors.

However, the market’s response also acknowledged the report’s nuances. Gains were pared at times as traders digested the implications of rising prices and what that means for interest rates. If the Fed perceives that inflation in the service economy is not abating, it may choose to keep monetary policy tighter for longer, which can be a headwind for equities. Moreover, wider risks – from global economic slowdowns to geopolitical tensions – continue to cap risk appetite. As a result, while the ISM news gave stocks a welcome lift, further upside for the S&P 500 index may hinge on evidence that inflation is coming under control, allowing central banks some leeway to ease up on tightening.

Central Bank Outlook: Fed and Peers Remain Vigilant

The April ISM data arrives at a crucial time for central bankers. For the Fed, the combination of steady growth and elevated price readings in the service sector presents a policy dilemma. On one hand, the lack of any severe economic slowdown gives the Fed room to pause and assess incoming data rather than rush into rate cuts. On the other hand, the sticky inflation signals from the services PMI reinforce the case for remaining cautious and potentially keeping interest rates at a restrictive level until there is clearer evidence that inflation is on a sustained downward path. It is widely expected that the Fed will hold its benchmark rate steady at upcoming meetings, emphasising a data-dependent approach. Market expectations for rate cuts later in the year have been dialled back slightly, as officials have signalled that taming inflation is still the priority.

Other major central banks are in a similar position. The Bank of England, for instance, faces Britain’s own mix of moderate growth and persistent inflation, and is likely to interpret robust US data as affirmation that global demand remains intact – a positive factor – even as it keeps a watchful eye on price trends. The European Central Bank, too, will note that the world’s largest economy continues to expand, which could support export demand, but they remain focused on bringing down inflation in the eurozone. In essence, the latest US services report bolsters the case for a cautious stance across the board: policymakers will be wary of prematurely loosening financial conditions when parts of the economy are still running hot in terms of prices.

Conclusion: The April ISM non-manufacturing report paints a picture of a US service sector that is fundamentally sound, with growth exceeding expectations and helping to lift market sentiment. At the same time, the flare-up in prices underscores that inflation risks have not receded, keeping central bankers on guard. This delicate balance of steady expansion with undercurrents of inflation means both investors and policymakers must stay agile. Going forward, the trajectory of the S&P 500 and the timing of any Fed policy shifts will hinge on whether the economy can maintain momentum while gradually cooling inflation – the elusive “soft landing” that markets hope to see.