ISM® PMI® Reports Roundup: July Services
The ISM® Services PMI® Report for July indicated that the sector that makes up the overwhelming share of U.S. gross domestic product (GDP) might not be running on all cylinders, but it has been undeniably resilient.
Boosted by robust demand, the composite PMI® reading was steady, increasing 0.1 percentage point to 54.1 percent, despite a contraction in employment and nagging high prices. Lead times have improved slightly (the Supplier Deliveries Index decreased to 52.8 percent) despite disruption threats in the Middle East, and companies have deftly dealt with varying commodities pricing and availability.
However, the labor and prices factors dominated discussion after the report’s release on Wednesday, and they remain top of mind for procurement organizations. The Employment Index (47.4 percent) reentered its recent contraction rut as companies continued to process the impact of AI, and the Prices Index (70.3 percent) returned above the 70-percent threshold, reflecting higher costs for not only products, but also financing.
📊 US services hold steady at 54.1 ISM, but input costs surge to 70.3 as oil spikes after US-Iran talks collapse. Hiring slows sharply. Will sticky inflation delay Fed rate cuts? The consumer is resilient – for now. Watch oil prices closely. #economy #Fed
— Dino Vibes Daily (@DinoLeadingNews) August 5, 2026“The U.S. services economy continues to be resilient,” Steve Miller, CPSM, CSCP, Chair of the Institute for Supply Management® (ISM®) Services Business Survey Committee, told a conference call of reporters. “Concerns still exist regarding mortgage and inflation rates. We’re still in the midst of pricing impacts due to the run up in petroleum costs that started in February.”
The Employment Index reading for July — in line with private payrolls data from ADP, also released on Wednesday, that came in below expectations — has been most puzzling, considering the sustained demand for much of the year. Miller took a deeper dive into the data and found the slump is becoming historic.
The index has contracted in 12 of the last 18 months. The last time that happened was in 2008-10, which is never a good timeframe for economic data comparisons.
Among companies surveyed in July, 14.3 percent reported adding workers, down from 16 percent in June, while 19 percent reduced head counts, up from 10.9 percent. Business Survey panelists are increasingly commenting that AI is impacting staffing decisions, Miller said.
“The indication I get from the respondents is that they’re still in the testing phase,” he said. “I think it’s too early to tell if it’s permanent.”
Miller added, “It seems like something different is happening (with employment) over the last 12 to 18 months than we’ve seen before. Whether it has to do with tariffs, the Iran war or AI — probably a little bit of all three — remains to be seen.. But there’s reason to expect that there will be more commentary around the AI impact on labor.”
Prices are another yellow-to-red flag, especially as they further impact capital expenditures. In the ISM® Supply Chain Planning Forecast in June, services panelists projected their companies would increase investment by 6.4 percent for the rest of the year, a level that typically exudes confidence.
However, inflation and higher financing costs are likely impacting the amount of stuff companies can buy.
Between the weakening momentum in ADP figures and the sub 50 ISM services employment component, do we have to be concerned about Friday's NFP report. World Cup strength was supposed to keep this together for longer but seems like that dynamic was lower than expected.
— Craig Shapiro (@ces921) August 5, 2026“It seems like since both financing costs and prices paid have been elevated for an extended period of time, those have been key contributors to services companies saying they’re going to increase expenditures for capital,” Miller said. “It’s still a decision around where the cash is used. So, that spending is a positive sign from a confidence standpoint, but based on recent comments, it’s not going to be as significant as I was expecting when I saw the (Supply Chain Planning Forecast) numbers.”
Demand continues to cook, and Miller said there was no evidence of seasonal factors in July. The Business Activity Index increased to 59.1 percent, and the New Orders Index elevated to 57.2 percent. The Backlog of Orders Index (50.9 percent) decreased 4 percentage points, but the New Export Orders Index (52 percent) was up compared to June.
However, there’s still uncertainty with an Iran war in which there have been repeated false starts on a resolution, and the White House announced a new suite of tariffs last month.
Perhaps this comment from a panelist in Wholesale Trade sums up the sector: “Business is more robust than expected, considering some of the economic headwinds still plaguing the industry. Lumber supply is tighter, and freight rates and availability are challenges. Many of our builders are pushing back hard on price increases. However, the outlook is favorable for the remainder of 2026.”
There were happy faces all over the Services PMI® data, but companies and procurement organizations are most concerned about challenges and warning signs. And in July, they seemed a little more pronounced.
The ISM® PMI® Reports roundup:
Bloomberg: U.S. Services Activity Continues to Expand on Resilient Demand. “New orders growth accelerated and a measure of business activity climbed to a five-month high, pointing to resilient consumer demand. Even so, rising costs for services and materials continued to weigh on firms. … Some firms may be choosing to hold off on hiring as persistently high costs pressure profits and consumers.”
CNBC: ISM Services PMI® Comes in at 54.1 in July, Missing Expectations. “The (Employment Index) is coming in light as well — sub-50 percent,” analyst Rick Santelli said. “It’s in contraction territory again at 47.4 percent; we were looking at a number over 51 percent. … On the employment side, it’s been a little bit weak, and the (U.S. Federal Reserve) did some easing because the labor market was a little bit weak. We’ll see if that test holds true with some of the anecdotal evidence showing a little backtracking in the labor space.”
Mace News: Services Sector Expands for 25th Month in July But Effects of Higher Business Activity, New Orders Offset by Slower Hiring amid Tariffs, Iran War, AI Use. “The World Cup soccer games that took place from June 11 to July 19 in the U.S., Canada and Mexico supported rises in business activity and new orders in July, but there was no direct link to the drop in the Employment Index, Miller said. In the June report, the event helped employment gains in Accommodation & Food Services, but they account for only 3 percent of the U.S. GDP and thus were not a driver behind the (index) increase.”
MarketWatch: U.S. Economy Keeps Up the Momentum, But Rising Costs Put a Cap on New Hiring. “The huge services side of the economy is the best barometer of growth. The economy is expanding at an above-average speed amid the ongoing conflict with Iran, powered by the boom in artificial intelligence and strong spending by upper-income Americans. … The momentum in the second quarter might be hard to sustain unless the war ends, oil prices fall and inflation subsides.”
Time out for #ISMPMI trivia! The July Manufacturing composite index (55.6%) was higher than its Services counterpart (54.1%). When was the last time that happened? It was in February 2022, when the MFG PMI® registered 58.1%, the SVCS index 57.1%. https://t.co/xNSJbjUBrv #economy
— Dan Zeiger (@ZeigerDan) August 5, 2026
Reuters: U.S. Service Sector Maintains Strong Growth Pace in July. “(The Prices Index increase) would suggest inflation was set to pick up after slowing in June on the back of a retreat in energy prices when the ceasefire between the U.S. and Iran took hold. Economists have warned that underlying inflation could remain elevated even if oil prices dropped because of an AI spending boom.”
The Wall Street Journal: U.S. Services-Sector Activity Continued to Expand in July. “Economists polled by The Wall Street Journal expected a reading of 54.5 percent. … The New Orders Index registered 57.2 percent, higher than June’s figure. The Employment Index returned to contraction territory after only one month of expansion.”
In case you missed last week’s ISM® PMI® Reports Roundup on the release of the July ISM® Manufacturing PMI® Report, you can read it here. For the most up-to-date content on the reports under the ISM® PMI® Reports umbrella, use #ISMPMI on X, formerly known as Twitter.
(Photo credit: Getty Images/VM)