U.S. ISM Non-Manufacturing Prices Miss Slightly, Suggesting Easing Inflation Pressures: Sector Rotation Opportunities in Construction vs. Caution in Consumer Durables

The U.S. ISM Non-Manufacturing Prices Index for July 2025 came in at 69.9%, a 2.4-point rise from June's 67.5%. While this reading marks the highest level since October 2022 and the eighth consecutive month above 60% (a threshold for sustained price increases), it remains below the 70% mark for the 33rd month in a row. This subtle deviation from the 70% ceiling—a level last seen in late 2022—suggests a nuanced shift in inflationary pressures. For equity investors, this data points to a critical inflection point: services-sector inflation is stabilizing, but manufacturing-driven consumer durables face persistent headwinds. The implications for sector rotation strategies are clear: Construction and Engineering firms may offer asymmetric upside potential, while Consumer Durables stocks warrant caution.

The Services Sector: Construction's Resilience Amid Easing Inputs

The ISM Non-Manufacturing report highlights that 15 of 18 services industries reported higher prices in July, with Construction, Real Estate, and Transportation & Warehousing leading the charge. However, the key insight lies in the nature of the inflation. Unlike the sharp spikes seen in 2021–2022, today's price pressures in Construction are driven by labor shortages and project management costs, not raw material volatility. For example, tariffs on steel and aluminum have plateaued, and supply chain bottlenecks have eased compared to pandemic-era peaks.

This dynamic creates a unique opportunity for Construction and Engineering firms. Companies like Bechtel Group (BHI) and AECOM (ACOM) are positioned to benefit from two tailwinds:
1. Labor-driven inflation: As wages rise to attract skilled workers, margins for firms with strong project management capabilities (e.g., those using AI-driven scheduling tools) could expand.
2. Tariff normalization: With global trade tensions stabilizing, input costs for materials like steel and concrete are unlikely to surge further, reducing margin compression risks.

The Manufacturing Sector: Consumer Durables in a Tariff-Driven Quagmire

Contrast this with the ISM Manufacturing Prices Index, which hit 63.7% in August 2025, down slightly from July's 64.8%. While this suggests a moderation in material cost increases, the underlying drivers—tariffs, supply chain bottlenecks, and geopolitical tensions—remain entrenched. For Consumer Durables, the pain is acute:
- Tariff pass-through: Companies like Hasbro (HAS) and Whirlpool (WHR) face margin erosion as tariffs on imported components (e.g., electronics, machinery) force price hikes.
- Labor shortages in agriculture: Rising costs for raw materials like fresh vegetables (up 38.9% in July PPI) ripple into food manufacturing and home goods.
- Trade policy uncertainty: Reciprocal tariffs with China and the EU are creating a “tariff spiral,” making inventory management and pricing strategies riskier.

Investors in this sector must tread carefully. While durable goods like appliances and electronics remain in demand, the cost structure is increasingly unbalanced, with margins under pressure from both upstream and downstream forces.

Strategic Sector Rotation: Where to Allocate and Where to Hedge

The data underscores a divergence in inflation dynamics:
- Construction and Engineering: Favor firms with pricing power in labor-intensive services and those leveraging technology to offset wage pressures. Look for companies with strong balance sheets to weather short-term volatility.
- Consumer Durables: Avoid overexposure to firms reliant on imported materials or operating in tariff-sensitive niches. Instead, consider hedging with short-term Treasury bonds or defensive plays in the sector (e.g., Johnson Controls (JCI), which has diversified supply chains).

The Road Ahead: Monitor Tariff Developments and Labor Market Shifts

The critical variables for investors will be tariff negotiations and labor market flexibility. If the U.S. and China reach a trade agreement by Q4 2025, Consumer Durables could see a relief rally. Conversely, a hardening of trade policies would amplify risks. Meanwhile, Construction firms that adapt to labor shortages—through automation, apprenticeship programs, or AI-driven project management—will outperform peers.

In conclusion, the ISM data is not a “miss” in the traditional sense but a signal of shifting inflationary gravity. Equity investors should pivot toward services-sector leaders in Construction and Engineering while maintaining a cautious stance in Consumer Durables. The next 6–12 months will test the resilience of both sectors, but the data suggests that services-driven growth is the more defensible bet.