US Activity Was Surging Ahead of Military Action

Why It Matters

Robust ISM readings suggest strong growth, but potential energy shocks could reshape inflation dynamics and Fed policy.

Key Takeaways

• ISM services index rose to 56.1 in February.
• Business activity hit 59.9, fastest since May 2024.
• New orders index 58.6; backlog surged to 55.9.
• Q1 2026 GDP growth projected above 3%.
• Energy price spikes risk demand‑destructive impact.

Pulse Analysis

The latest ISM surveys paint a picture of a U.S. economy that has regained momentum after a turbulent two‑year stretch. A services index of 56.1 and a composite business activity reading of 59.9 not only sit comfortably above the 50‑point growth threshold but also mark the quickest expansion since mid‑2024. Such figures echo the manufacturing sector’s return to growth, with consecutive readings above 50, suggesting that order backlogs and new demand are finally catching up with supply‑side constraints.

Analysts interpret these data points as a strong indicator that first‑quarter 2026 GDP could surpass the 3% annualized mark, a level that would reassure investors and policymakers alike. The Fed, which has been balancing inflation concerns against the need for economic support, may view the solid core metrics as a green light for modest rate cuts later in the year, provided headline inflation eases as energy‑related pressures subside.

Yet the optimism is tempered by geopolitical risk. A protracted military campaign in the Persian Gulf threatens to disrupt oil flows, pushing energy costs higher and squeezing household budgets. Elevated fuel and heating expenses could dampen consumer spending, turning the current demand surge into a short‑lived spike. If core inflation begins to cool while headline numbers stay sticky, the central bank could adopt a more cautious stance, weighing the trade‑off between price stability and sustaining the newfound growth momentum.