U.S. services PMI unexpectedly shrinks, hitting a new two-year low, while manufacturing expansion exceeds expectations

On February 21, Friday, data released by S&P Global showed that the U.S. February services PMI unexpectedly fell into contraction, reaching a new low since January 2023; meanwhile, the previously weak manufacturing sector continued to improve and expanded again, better than expected; dragged down by the services sector, the February Markit composite PMI hit its lowest level since September 2023.

The U.S. February Markit PMI preliminary data is as follows, with 50 as the dividing line between expansion and contraction:

• The U.S. February Markit manufacturing PMI preliminary value is 51.6, the highest since June 2024, marking the second consecutive month of expansion, expected at 51.4, previous value 51.2. Among them, the output sub-index preliminary value rose to 53.8, the highest since March 2024, marking the second consecutive month of expansion; the employment sub-index preliminary value fell to the lowest since October 2024.
• The U.S. February Markit services PMI preliminary value is 49.7, the lowest since January 2023, expected at 53, previous value 52.9. Among them, the employment sub-index preliminary value fell to 49.3, the lowest since November 2024; the prices charged sub-index preliminary value hit the lowest since May 2020; new business inflows nearly stalled, although still expanding, but the expansion rate is the smallest in 10 months.
• The U.S. February Markit composite PMI preliminary value is 50.4, the lowest level in 17 months, expected at 53.2, previous value 52.7. Among them, the new orders sub-index preliminary value fell to 50.6, the lowest since April 2024, but still expanded for the tenth consecutive month; the employment sub-index preliminary value fell to the lowest since November 2024.

This PMI data has reversed the situation of strong services and declining manufacturing that has persisted for more than two years. This is the first occurrence since October 2022 of manufacturing expansion while services are contracting. The services index, a major driver of the U.S. economy, has contracted for the first time in two years. In fact, until the end of last year, the U.S. services sector had shown robust growth, but this index has weakened for two consecutive months.

Analysts say that the growth in manufacturing may be temporary, as some factories are ramping up production to beat the tariffs, thus driving short-term growth. Dragged down by the services sector, the U.S. February Markit composite PMI hit a new low in over a year, reflecting the impact of the uncertainty of Trump administration policies on orders and business expectations.

Data shows that inflationary pressures are rising. Overall input costs accelerated in February, reaching the highest level in five months:

Input costs in manufacturing reached the highest level since October 2022. Purchasing managers generally believe that price increases driven by tariffs and related suppliers are the main reasons for the rising costs.

Input costs in the services sector climbed to the highest level in four months, although output prices have retreated. The gap between input prices and output prices is putting pressure on corporate profits, which is the largest pressure since June 2023

Overall employment indicators show that employment positions decreased this month, mainly due to a 5-point drop in service sector jobs, marking the largest monthly decline since the U.S. economy was shut down by the COVID-19 pandemic in April 2020.

After the U.S. election, the market expected the Trump administration to introduce business-friendly policies, leading to an increase in corporate expectations for future activities. However, in February, this index fell to its lowest level since September of last year. The report noted that this deterioration mainly reflects increased uncertainty about the business environment, particularly due to uncertainties arising from government spending cuts and tariff policies.

Respondents to the PMI survey also expressed concerns about rising prices and broader geopolitical risks.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated in a statement:

The optimism among U.S. businesses at the beginning of the year has dissipated. Instead, there is a bleak outlook characterized by heightened uncertainty, stagnation in business activity, and rising prices.

Optimism about the coming year has fallen from nearly a three-year high at the beginning of the year to the most pessimistic levels since the pandemic. Businesses report widespread concerns about the impact of federal government policies, from spending cuts to tariffs to geopolitical developments. The uncertainty brought about by changes in the political landscape has hurt sales, and suppliers have raised prices due to tariffs, leading to price increases.

Although the survey indicated strong economic growth of over 2% at the end of last year, the February survey suggests that the current annualized GDP growth rate is only 0.6%.

Despite overall inflationary pressures remaining modest, this reflects that service sector profit margins are being squeezed as businesses seek to absorb rising costs to offer competitive prices amid weak demand. Worryingly, manufacturing input prices related to tariffs have surged, which could further exert upward pressure on inflation in the coming months or further squeeze U.S. corporate profit margins.

Following the release of U.S. PMI data, the yield on the 10-year U.S. Treasury bond briefly dropped about 3 basis points, falling below 4.46% to refresh the daily low, with an overall decline of more than 4 basis points for the day; the yield on the 2-year U.S. Treasury bond briefly plunged nearly 3 basis points, dropping below 4.23% to refresh the daily low, with an overall decline of about 4 basis points for the day. Subsequently, due to concerns about the economy, U.S. stocks fell sharply, with the Nasdaq dropping more than 2% during the session.

The preliminary survey data from S&P Global for February is based on information collected from February 10 to February 20, covering approximately 85% of the complete survey size. The final data for the manufacturing PMI will be released on March 3, while the final data for the services and composite indices will be released on March 5