ISM: US Services Sector Slows on Weak Demand, Soft Hiring and Rising Costs as Tariffs Begin to Bite

--ISM Services Index 50.1 Vs. 50.8 in June, 49.9 in May, Below Consensus 51.5

--ISM’s Miller: Employment Index’s Continued Contraction, Faster Rise in Prices Index Worrisome

--Miller: Expansion in Business Activity, New Orders Indexes Highlight Resilience of Services Sector

--Miller: Firms Wary of Impact of an Expected Fed Rate Cut as Inflation Remains High

(MaceNews) – The U.S. services sector was barely in expansion territory for the second straight month in July but unexpectedly slowed down close to the growth-contraction border line, hit by sluggish demand, failure to hire qualified workers and rising costs, as the protectionist U.S. trade policy had a clearer impact, data from the Institute for Supply Management showed Tuesday.

The ISM purchasing managers index, which shows the directional change of economic activity, fell 0.7 percentage point to 50.1 after rising 0.9 point to 50.8 in June and dipping 1.7 points to 49.9 in May, which was the first contraction in 11 months. It was much weaker than the consensus call of 51.5 but better than the ISM manufacturing PMI that posted its fifth straight contraction in July with a full percentage point drop to 48.0.

The July report indicated continued slow growth in the services sector, with some firms noting that seasonal and weather factors had negative impacts on business, Steve Miller, chair of the ISM Services Business Survey Committee, said in a statement.

“The employment index’s continued contraction and faster expansion of the prices index are worrisome developments,” he said. “The new exports (a 3.2-percentage point decrease in July) and imports (a 5.8-point drop) indexes, which both moved from expansion to contraction, provided signals that tariff tensions are impacting global trade.”

“However, continued expansion in the business activity and new orders indexes, together with a slight improvement in the backlog of orders index, highlight the resilience of the U.S. services sector,” Miller told a news conference but quickly added, “No question, however, that tariffs are raising prices paid and a potential driver of future inflation.”

The ISM July report showed the negative impact of stiff Trump duties on imports of many goods to the United States had become more apparent, particularly in higher costs, which is consistent with the results of the group’s semi-annual report issued in May that predicted that firms would wait for several months before they pass through tariff-triggered price increases, he said. “So, we are seeing that pressure in the supply chain.”

The employment sub-index slid to a four-month low of 46.4 in July from 47.2 in June (down 3.5 points), posting its sixth contraction in 12 months and fourth in the past five months, after hitting 53.9 in January for the highest since December 2021.

“BLS’s restatement of its May and June employment numbers makes more sense in this context,” Miller told reporters, referring to larger-than-normal downward revisions to non-farm payroll job creation in those months that the Bureau of Labor Statistics reported in its July data on Friday.

“Our contraction readings in June and July indicate that BLS numbers will continue to be weak through the rest of the summer,” Miller predicted.

The other thorny spot in the July report is the sub-index on the prices paid by services organizations for materials and service, which rose 2.4 points to 69.9 after slipping 1.2 points to 67.5 in June, hitting the highest since 70.7 in October 2022.

Higher tariffs are increasing the cost of imported feed ingredients and trace minerals for livestock and poultry feeds, according to ISM report. A firm from the health care and social assistance category noted, “Tariffs are causing additional costs as we continue to purchase equipment and supplies. Though we need to continue with these purchases, the cost is significant enough that we are postponing other projects to accommodate these cost changes.”

The index was stuck above 80 for about a year from mid-2021 as massive fiscal stimulus under the low borrowing cost environment revived pandemic-choked demand and sparked decades-high inflation in major economies (except for Japan). It was made worse by Russia’s invasion of Ukraine in February 2022 that threatened stable supply of energy and commodities from the region.

A series of deals struck between Washington and its (sort of) allies in late July after weeks of trade negotiations somewhat eased fears of a heightened global trade war but uncertainty remains and this piece of news came in a little too late for ISM member firms to digest.

“In the services survey, we didn’t see any of that coming through in the commentary,” Miller said. “We will wait and see next month if we see it come through and whether the timing was the issue or whether it is mainly impacting manufacturing and not so much the services sector.”

One slightly bright spot was increased activity in the transportation industry in general as well as higher prices for and tighter availability of pallets for shipping and storing goods, he said, adding that it may be reflecting strong orders for defense equipment.

Asked whether service providers will become more active in light of a widely expected interest rate cut by the Federal Reserve in September, Miller noted that the construction industry has been in contraction in the past four months and had already seen expectations for three Fed rate cuts earlier this year fail to support it as mortgage rates remained high.

“If it were me, I would certainly wait and see on the Fed cut, especially looking at the prices paid index being so high,” he said, reminding that a rate cut aimed at supporting business activity would also push up inflation.

“If you look at the trend in the last nine months on the prices index, it’s very similar to the trend that we saw the highest inflation during the Covid time,” Miller said. Unless the Trump administration provides more fiscal stimulus and the Fed lowers borrowing costs significantly, policy measures would not jump-start the economy while inflation remains high, he said.

“I’m not good at betting on these things but where I would put my money is a quarter percentage point (cut) in September but we are not going to see any more than that,” he said.

Among the four sub-indexes that directly factor into the services PMI, the business activity/production index: 52.6 in July vs. 54.2. The index has not been in contraction territory since May 2020.

The new orders index: 50.3 vs. 51.3. The index has been in expansion territory in 29 of the last 31 months. Comments from respondents pointed to strong demand driven by the build-out of artificial intelligence-related data center capacity and semiconductor industry expansion fueled by national policy as well as a surge in orders for defense equipment.

The employment index: 46.4, a four-month low vs. 47.2. It was its sixth contraction in 12 months and fourth in the past five months, after hitting 53.9 in January for the highest since December 2021. Firms noted difficulties in recruiting service technicians and backfilling positions left open by normal attrition with qualified candidates.

The supplier deliveries index (the only inversed subindex): 51.0 vs. 50.3; slower supplier performance for the eighth month in a row. It was the only index among the four that showed an increase in July.

Among other subindexes, the prices paid index: 69.9 vs. 67.5; the eighth straight month above 60 but the 33rd in a row below 70. It is the index’s highest since October 2022 (70.7). Fifteen of the 18 services industries reported an increase in prices paid during the month of July, led by wholesale trade; real estate, rental & leasing; information; transportation & warehousing; accommodation & food services; construction.

The inventories index: 51.8 vs. 52.7; in expansion territory for the fifth time in 2025. Comments from respondents include: “Stocked up before tariffs; working down inventory” and “Inventory reduction efforts are in place due to lower back orders of product.”

The new export orders index: 47.9, a four-month low vs. 51.1. Respondent comments include: “New contracts will expand operations to Italy, Germany, Ireland and Thailand” and “Unpublished and subtle backlash toward U.S.-owned companies.”

The imports index: 45.9 vs. 51.7; in contraction territory for the fifth time in 2025. Among comments from surveyed firms: “Planning requirements are being fulfilled for outages and storms, along with any contingency service agreements” and “Imports have increased in price, to be less competitive than domestic