Amid uncertainties stemming from President Donald Trump's policies and recent weak data that have raised questions about U.S. exceptionalism, Wednesday's activity reports exceeded expectations.

The Institute for Supply Management (ISM) report revealed that the services sector unexpectedly rebounded in February, rising to 53.5 from 52.8 in the previous month. Readings above 50 indicate expansion, and these figures contradicted economists' forecasts of a decline.

Meanwhile, the index for new orders within the report showed an increase in February, while the measure of prices paid for service inputs surged to a nearly three-year high. This signaled ongoing price pressures in the U.S., keeping concerns over the economy's resilience alive amid growing risks to growth.

The ISM services employment index climbed to its highest level since December 2021, following earlier private payroll data that showed the smallest increase since July.

According to ADP's report, hiring at U.S. companies slowed significantly in February, with payrolls rising by only 77,000 compared to a revised 186,000 in January. The regional distribution of job losses suggests that the sharp slowdown in private sector job growth may have been influenced by adverse weather conditions. However, policy uncertainty and a sharp decline in consumer spending are also likely contributors to the slowdown in hiring.

Tariffs and Policy Risks Weigh on Economic Outlook

Comments from industry representatives in the ISM report highlighted significant uncertainty regarding future business activity due to the risks posed by tariffs and other potential government actions. This uncertainty has created a chaotic environment for pricing, forecasting, and long-term contracts.

The Federal Reserve's Beige Book, also released on Wednesday, echoed similar sentiment within the business community. Economic activity increased slightly but unevenly since mid-January, while prices rose moderately in most regions. However, a few areas reported faster price increases compared to the previous period.

Additionally, businesses placed greater emphasis on the uncertainty stemming from the new administration's policies. The report referenced tariffs 49 times and variations of the word "uncertainty" 47 times—marking a dramatic rise from 23 and 17 mentions, respectively, in January.

The Beige Book underscored growing concerns among businesses over the impact of Trump's tariff, tax, and immigration policies on demand and prices. This report serves as a snapshot of economic sentiment across the country, published two weeks before each Fed meeting.

Policymakers are set to convene on March 18-19, with expectations that interest rates will remain unchanged. However, the Fed may face a challenging decision-making process in the coming months.

The Atlanta Fed's GDPNow model, following weak manufacturing and construction data earlier in the week, forecasts a 2.8% contraction in GDP for the first quarter. While this estimate may improve slightly with the inclusion of service sector data, it is unlikely to be sufficient to alleviate concerns over an economic slowdown.

White House Grants Temporary Tariff Exemption for Auto Imports

On Wednesday, the White House announced that automobiles imported under the U.S.-Canada-Mexico trade agreement would be exempt from a 25% tariff for one month. However, other imports from these countries, along with goods from China, remain subject to high tariffs, with more potentially on the way.

These tariffs are expected to drive up prices across a wide range of products, from small food items like avocados to capital goods. This could slow growth by dampening both investment and consumer spending. If affected countries retaliate, the outlook could deteriorate further.

In early February, the Brookings Institution projected that retaliatory actions from Canada and Mexico could reduce U.S. GDP by 0.32% and employment by 0.25%. Additionally, Trump's deportation policies and efforts to shrink the federal workforce could create further headwinds for the labor market.

Traders Brace for Labor Data as Growth Risks Dominate Sentiment

Later in the day, markets will be watching the Challenger Job Cuts report and weekly jobless claims data. As the Duhani Capital Research team, our view is that these figures will have a limited impact on market movements as traders await Friday's payroll numbers.

The most critical component of the latest data set will be the official employment report, which will shape expectations for the Fed. Economists' median estimates suggest that U.S. nonfarm payrolls likely increased by 160,000 in February, with the unemployment rate remaining steady at 4%.

Since federal layoffs occurred outside the payroll survey week, their impact is not expected to be reflected in the February report. However, federal funding cuts may have affected government and contractor employment, and overall uncertainty likely weighed on hiring decisions.

On the other hand, even if the jobs report falls short of expectations, drawing conclusions about the end of U.S. exceptionalism based on a few data points would be premature.

That said, markets have been heavily focused on growth risks in recent weeks, and traders may quickly jump into recession bets if labor data disappoints—potentially sending the U.S. dollar even lower.