U.S. ISM Non-Manufacturing Prices Fall Slightly Below Forecast: Sector-Specific Opportunities and Risks Emerge

The U.S. ISM Non-Manufacturing (Services) Prices Index for August 2025 registered 69.2, a 0.7-point decline from July's 69.9 but still the second-highest reading since November 2022. This data point, while slightly below expectations, underscores persistent inflationary pressures in the services sector, with 16 of 18 industries reporting price increases. For investors, the sector-specific breakdown of this index offers a roadmap to identify both opportunities and risks in a fragmented economic landscape.

Key Trends in Sector-Specific Price Pressures

The ISM data reveals a stark divergence in inflationary dynamics across industries. Mining, Accommodation & Food Services, and Information led the charge in price increases, driven by supply chain bottlenecks, labor shortages, and demand for technology-driven solutions. Conversely, Construction and Transportation & Warehousing faced softer price pressures, albeit still above the 50% threshold for expansion.

The Healthcare & Social Assistance sector, for instance, saw a 3.1% annualized rise in costs, reflecting ongoing labor cost inflation and regulatory tailwinds. Meanwhile, Professional, Scientific & Technical Services benefited from AI-driven productivity gains, which offset some cost pressures but left margins vulnerable to input price shocks.

Investment Opportunities in Resilient Sectors

1. AI-Driven Services and Intellectual Property
   The ISM data aligns with broader GDP Price Index trends, which highlight artificial intelligence as a key inflationary buffer. Sectors like Information Services and Professional & Technical Services are leveraging AI to enhance productivity, reducing the need for price hikes. Investors should overweight companies with strong R&D pipelines in AI, such as those in cloud computing and data analytics.

2. Healthcare and Fintech
   The Healthcare & Social Assistance industry's 3.1% annual price increase, while concerning, signals robust demand. Fintech firms, particularly those integrating AI for risk management and customer service, are also outperforming. These sectors offer defensive characteristics amid inflation, though valuations must be scrutinized for overreach.

3. Real Estate and Rental & Leasing
   Despite muted Q2 GDP Price Index performance, the Real Estate sector remains a mixed bag. While housing costs rose 0.3% monthly, elevated interest rates have suppressed construction activity. Investors may find value in REITs with exposure to industrial and logistics properties, which benefit from e-commerce growth and supply chain reconfiguration.

Risks in Vulnerable Sectors

1. Manufacturing-Linked Services
   The Wholesale Trade and Construction sectors face indirect risks from tariffs and supply chain disruptions. For example, the 15% average global tariffs on manufacturing inputs have pushed up costs for services reliant on imported materials. Investors should underweight these sectors unless hedging strategies are in place.

2. Energy and Utilities
   While not explicitly highlighted in the ISM data, the Utilities sector's price pressures are indirectly tied to energy costs. With global energy markets still volatile, utilities remain a high-risk area for long-term investors.

3. Consumer-Driven Services
   Accommodation & Food Services reported significant price increases, but these may not be sustainable as consumer spending shifts toward value-conscious alternatives. Restaurants and hotels with high fixed costs could face margin compression if demand softens.

Strategic Recommendations for Investors

• Overweight Services Sectors with AI and Automation: Prioritize industries where productivity gains can offset inflation, such as Information Services and Professional & Technical Services.
• Underweight Tariff-Exposed Sectors: Avoid sectors like Wholesale Trade and Construction, where cost pressures are likely to persist.
• Diversify Across Inflation Hedges: Allocate to real estate and healthcare, which offer resilience but require careful screening for overvaluation.
• Monitor Policy Shifts: The Federal Reserve's potential rate cuts in 2026 could alleviate pressure on housing and consumer services, but timing remains uncertain.

Conclusion

The August ISM Non-Manufacturing Prices Index, while slightly below expectations, confirms that inflation remains entrenched in the services sector. For investors, the key lies in parsing sector-specific data to identify where price pressures are transient versus structural. By focusing on AI-driven growth areas and hedging against tariff-related risks, portfolios can navigate the divergent tides of the U.S. economy in 2025 and beyond.