Business activity in the US services sector stayed in positive territory for the 14th straight month in February, with the key index edging down after surging to a four-month high on higher new orders at the start of the year. The ISM index fell 0.8 percentage points to 52.6 in February after rising 2.9 points to 53.4 in January that followed a 12-month low in December of 50.5. The index came in below the median economist forecast of 53.0 but just above its 12-month average of 52.4.

"The slight decrease in the rate of growth in February is a result of faster supplier deliveries and the contraction in the employment index," said survey chief Anthony Nieves in a statement."The majority of respondents are mostly positive about business conditions. Respondents remain concerned about inflation, employment and ongoing geopolitical conflicts."

Employment conditions remain mixed in the services sector as some firms are still struggling to find workers while others are holding at post-peak employment levels, Nieves told reporters.

Supply deliveries are basically on a recovery trend with a few bumps in the past several months. In January, deliveries were delayed by bad weather in some US regions, the impact of attacks in the Red Sea, which prompted shipping firms to avoid the Suez Canal in Egypt, as well as congestion at the drought-hit Panama Canal, a key route for cargo going between Asia and the US East Coast.

Shipping delays and elevated food prices have exerted upward pressures on overall costs for service providers, which could keep service prices sticky in US CPI data and thus leave Federal Reserve policymakers cautious about lowering interest rates from the currently restrictive level.

Nieves told reporters that different firms have different views on inflation, showing contradiction, but that the ISM prices paid index has been in growth territory for nearly seven years, as upward pressures are evident in the costs for groceries and restaurants.

Of the four sub-indexes that directly factor into the services PMI, the business activity index rose 1.4 percentage points to a five-month high of 57.2 in February after being flat at 55.8 in January. It is much lower than 59.2 seen at the start of 2023 but is still above 52.9 in May and 53.3 in April 2023, which were three-year lows. The new orders index rose 1.1 points to a six-month high of 56.1 in February after rising 2.2 points to 55.0 in January. It indicates expansion for the 14th consecutive month.

The employment index showed contraction for the third time in 12 months, falling 2.5 points to 48.0 after surging 6.7 points to 50.5 in January and slumping 6.8 points to 43.8 in December, which was the lowest since 43.0 in July 2020.

The supplier deliveries index -- the only ISM index that is inversed -- fell 3.5 points to 48.9 in February after rising 2.9 points to 52.4 in January. The index returned to contraction, indicating that supplier delivery performance was faster after one month in expansion (or 'slower') territory. In the last 12 months, the average reading of 48.7 (with a low of 45.8 in March 2023) reflects the fastest supplier delivery performance since December 2022 when the index stood at 48.5. A reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases.

ISM services are expected to edge lower in February to 53.0 versus 53.4 in January. This index has been running the past year in the mid-to-low 50s.

Producing a monthly composite on general activity tracked in volumes, the Institute for Supply Management surveys several hundred service-providing firms from 16 industries (construction and mining are included). The services composite index has four equally weighted components: business activity (closely related to a production index), new orders, employment, and supplier deliveries (also known as vendor performance). The first three components are seasonally adjusted but the supplier deliveries index does not have statistically significant seasonality and is not adjusted. For the composite index, a reading above 50 percent indicates that the services economy is generally expanding; below 50 percent indicates that it is generally declining. The supplier deliveries component index requires extra explanation: a reading above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM services index, investors will know what the economic backdrop is for the various markets. The services index is a composite of four equally weighted components: business activity, new orders, employment, and supplier deliveries. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly -- and causing potential inflationary pressures. While the ISM manufacturing index has a long history that dates to the 1940s, this report goes back to 1997. Note that in 2020 the ISM changed the name of the report to services from non-manufacturing though it continues to track two key goods producing industries: construction and mining.