U.S. Services PMI Shows Slow Growth Amid Rising Prices and Employment Challenges

Economic activity in the U.S. services sector demonstrated slow growth in July, as revealed by the latest Services ISM® Report On Business®, registering a Services PMI® of 50.1 percent. Although this figure marks a 0.7 percentage point decrease from June's reading of 50.8 percent, it remains above the 50-percent threshold that indicates expansion, reaffirming growth for the second month in a row after a dip in May. The report highlights a consistent expansion in the sector for 12 of the last 13 months. However, several components in the report reflect mixed conditions, notably the persistent contraction in employment and rising prices.

The Business Activity Index recorded an expansion with a reading of 52.6 percent in July, down from 54.2 percent in June. Although growth continues, the index decline suggests slower activity compared to the previous month. The sector has shown resilience by staying out of contraction territory since May 2020. Respondents indicated that certain factors like seasonal variations and weather conditions had adverse impacts on business operations, contributing to the slower pace of growth.

The New Orders Index dropped to 50.3 percent from 51.3 percent in June, continuing its expansion trend for nearly three years. However, the pace of new orders growth is decelerating, partly due to global trade tensions and tariff impacts, which are causing companies to adjust their procurement plans. Notably, orders linked to defense projects showed an uptick, while non-defense orders decreased.

Employment in the services sector showed a troubling trend, as the Employment Index fell further into contraction territory, recording 46.4 percent in July, slightly down from June’s 47.2 percent. This marks the fourth contraction in the last five months, raising concerns among executives about the ability to fill positions in certain areas amidst normal attrition rates.

The Supplier Deliveries Index remained in expansion territory with a reading of 51 percent, up from 50.3 percent in June, signaling slower delivery times. This is typical during periods of increasing demand. Several respondents noted transportation congestion affecting delivery schedules, indicative of increased activity levels.

Prices paid by services organizations rose significantly, with the Prices Index capturing a new post-pandemic high at 69.9 percent, up from June’s 67.5 percent. This persistent increase in prices over the last eight months compounds inflationary pressures, a key concern affecting economic dynamics.

The Inventories Index showed slight expansion at 51.8 percent, a drop from 52.7 percent in June, as respondents noted efforts to reduce inventory levels given ongoing tariff adjustments and the reduced backlog of orders. Inventory sentiment continued to express a sense of being "too high" relative to business activity needs.

Order backlog slightly improved but remained in contraction, moving up to 44.3 percent from June’s 42.4 percent. This prolonged contraction over the last five months underscores challenges in demand replenishment, though some respondents noted a marginal improvement in backlogs due to closing sales rates.

New export orders saw a notable contraction, with an index reading of 47.9 percent down from June's 51.1 percent. Tariff-related uncertainties continue to weigh on sentiment, with reports of diminishing orders and subtle backlash against U.S.-owned operations abroad.

The Imports Index dropped sharply, recording 45.9 percent in July from 51.7 percent in June. This contraction reflects both price increases for imported goods and competitive domestic market shifts, causing buyers to rethink sourcing strategies.

Overall, the Services PMI® suggests ongoing growth but signals underlying challenges such as employment contraction, rising costs, and external trade pressures. Despite these difficulties, the sector's expansion has persisted, reinforcing its capacity to adapt amid volatile conditions. However, analysts predict that continuous inflation and trade uncertainties could further complicate recovery dynamics in following months.

Against this backdrop, service industries continue to navigate a complex landscape, balancing demand fluctuations, cost increases, and staffing challenges while fostering activity under constrained circumstances.