U.S. services sector activity experienced a surprising stagnation in July, with minimal changes in orders and a further decline in employment rates despite rising input costs. The Institute for Supply Management (ISM) reported that its non-manufacturing purchasing managers index (PMI) fell to 50.1, down from 50.8 in June, contrasting sharply with economist forecasts which anticipated a rise to 51.5. A PMI above 50 indicates growth, highlighting that the services sector, which represents over two-thirds of the economy, is facing challenges.
Analysts suggest that businesses continue to grapple with President Donald Trump’s aggressive tariff policies. Recently, the president informed numerous trading partners of significant import tax increases, set to take effect on August 7, with rates ranging between 10% and 41% on various imports. The average overall U.S. tariff rate has reportedly surged to 18.3%, the highest level since 1934, up from a more modest 2-3% prior to Trump’s administration.
In terms of order metrics, the ISM noted a decline in new orders to 50.3 from 51.3 in June, with export orders contracting for the fourth time in five months. Employment measures within the survey also dropped, showing a fall to 46.4, marking the lowest point since March and reflecting a contraction over four of the past five months. This trend coincided with disappointing employment figures released by the Labor Department, revealing weaker-than-expected job creation for July and significant downward revisions for May and June.
Moreover, price pressures are intensifying, with the prices paid index rising to 69.9, the highest since October 2022. While inflation had remained moderate as businesses sold off inventories acquired before tariffs took effect, recent data indicates a troubling trend of rising prices in sectors such as home furnishings.
The Federal Reserve recently opted to maintain its benchmark interest rate within the range of 4.25%-4.50%, largely viewing inflation as a critical concern. However, some Fed governors believe that job market vulnerabilities require more immediate attention, supporting calls for a reduction in interest rates.
This stagnation in the services sector presents a complex picture, highlighting the tug-of-war between economic growth and inflationary pressures amid an evolving tariff landscape. The hope remains that as businesses adapt and navigate these challenges, they may find ways to foster resilience and innovate within this uncertain environment.