Dive Brief:

• U.S. service sector activity expanded in January for the seventh consecutive month as a decline in new orders for services may signal concern about risks from tariff and deportation plans under the Trump administration.
• An index tracking activity among service sector purchasing managers fell last month to 52.8% from 54% in December but remained above the 50% threshold marking expansion, the Institute for Supply Management said on Wednesday. U.S. services generate about 76% of gross domestic product growth.
• Many respondents to an ISM survey “mentioned preparations or concerns related to potential U.S. government tariff actions,” Steve Miller, chair of ISM’s services business survey committee, said in a statement. “However, there was little mention of current business impacts as a result.”

Dive Insight:

President Donald Trump on Tuesday suspended until March 4 25% tariffs on imports from Mexico and Canada after discussions with his counterparts in the two countries. That same day, Beijing imposed retaliatory tariffs on U.S. imports in response to 10% duties on imports from China announced by Trump last week.

The decline in the ISM’s new orders gauge to a seven-month low “suggests that worries about immigration and trade policy under the new administration are overriding any optimism that businesses might have about the prospect of tax cuts or deregulation,” Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, said in a note to clients.

“That headline index is now at a level historically consistent with minimal growth in services activity,” Allen said, noting that the measure in recent years has not accurately reflected consumer spending.

ISM quoted several respondents to its monthly survey as voicing concern that tariffs will cause disruptions including increased prices and shortages of goods.

“Some apprehension exists with stakeholders and suppliers with government changes and potential tariff burdens,” said a service sector executive for a company that provides business with management and other support, according to ISM.

Federal Reserve policymakers, after reducing the main interest by a full percentage point from September through December, paused monetary easing last month partly because of a lack of clarity on the impact of changes to U.S. economic policy, including the imposition of tariffs.

“In the current situation, there’s probably some elevated uncertainty because of policy shifts in those four areas that I mentioned: tariffs, immigration, fiscal policy and regulatory policy,” Fed Chair Jerome Powell said on Jan. 29 after policymakers unanimously decided to hold the main interest rate between 4.25% and 4.5%.

“So you’re just on hold, waiting to see what comes down,” Powell said.

Richmond Fed President Tom Barkin echoed Powell on Wednesday, reiterating that the central bank will likely keep borrowing costs at the current level until the outlook on policy clears up.

“If you look forward, you have to say tariffs are coming, or here, or are going to be here. It's just incredibly hard to know exactly what it's going to be,” Barkin said in a Bloomberg Television interview.

“What I'm hearing from everyone I talk to is just elevated policy uncertainty,” Barkin said. “You mentioned tariffs, but deregulation — where is it going to hit? Where's the tax plan going to come out? What's going to happen to net migration? Energy policy? Geopolitics?

“I think there's just a lot of uncertainty in the air, and it's very hard to know what's happening with growth and employment — what's happening with inflation — until you get a little more clarity on all of these uncertainties,” he said.

At the same time, Powell, Barkin and other Fed officials have recently described the economy as healthy, with employment steady and inflation falling, albeit on a bumpy path.

“Overall, the U.S. economy is starting the year in a good position,” Fed Vice Chair Philip Jefferson said in a speech Tuesday. “I expect inflation's slow descent to continue, and I anticipate that economic growth and labor market conditions will remain solid.”