ISM Services Index Slows to 54.5 as Tariffs and Fuel Costs Squeeze Supply Chains

The U.S. service sector grew in October at its slowest pace in three months, with the Institute for Supply Management's services index slipping 0.4 point to 54.5, data released Nov. 4 showed. Readings above 50 signal expansion, so the sector is still growing — just more slowly, and under heavier cost pressure.

The details matter more than the headline. ISM's prices-paid index for materials and services came in at 73, the second-highest reading since mid-2022. That gauge hit a near one-year low in February, just before the Iran war sent fuel costs sharply higher. A measure of supplier delivery times jumped last month to its highest level since April. Longer lead times mean slower replenishment cycles and more working capital tied up in transit for shippers.

What does this change for shippers and forwarders?

Plenty, if ISM's own commentary is right. Steve Miller, chair of ISM's Services Business Survey Committee, said: "Tariffs and fuel cost impacts continued to be the most-cited issues impacting respondents' supply chains, while many respondents indicated they are not yet seeing the full impact of these cost escalations or have not passed them through to customers."

His conclusion is blunt: "This indicates that more pricing pressure is on the way if oil and tariff cost impacts are not mitigated."

That's the mechanism to watch. Firms are absorbing tariff and fuel costs today rather than passing them through. If they eventually do, the inflation pipeline reopens — and freight budgets get squeezed from both ends.

Demand is cooling but backlogs are deep

New orders, ISM's demand measure, slipped to a four-month low but stayed firmly in expansion. Order backlogs tell the stronger story: the backlog gauge was the highest since 2022, which signals service firms have full books and demand is not the problem. Costs are.

Employment picked up too. The jobs gauge rose to 51.4, its best since February, after months of cautious hiring as providers balanced robust demand against rising costs. Resilient consumer spending, a stable job market and strong business investment have supported services demand all year.

Fifteen services industries reported growth in October, including:

• Transportation and warehousing
• Information
• Entertainment

Construction and healthcare reported contraction.

What firms are saying on the ground

The survey's industry comments read like a freight market diary. An accommodation and food services respondent flagged that "fuel and freight markets continue to exert pressure on distribution cost planning," adding that the war in Ukraine, Midwest drought, and fuel and fertilizer costs are driving up the price of wheat.

Retail Trade was more pointed: "Tariffs are causing havoc with international merchandise sourcing."

An information-sector respondent said fuel prices have cut margins because the company hasn't passed costs to customers, betting the pressure is short-term. A management-of-companies respondent reported business activity "remains strong" but that "the impacts of tariffs, increased fuel prices, and longer lead times are becoming more challenging."

Even AI adoption showed up in the responses: one finance and insurance firm said it is increasing AI utilization but has "guardrails in place to cap token utilization and evaluate TCO." Construction, meanwhile, reported steady activity with a strong project backlog, better material availability — though some mechanical and electrical equipment still needs early procurement — plus persistent labor shortages, wage pressure and higher financing costs.

The takeaway for freight and logistics: demand fundamentals remain solid, but cost escalation is still in transit. Unless oil and tariff pressures ease, ISM's own data points to a second wave of price increases flowing through supply chains in the months ahead.