The US services sector continued to expand at a healthy pace in July, suggesting the economy remains resilient even as cracks emerge in the labor market. The ISM Services PMI edged up to 54.1 from 54.0, remaining comfortably above its 12-month average of 53.4. According to ISM’s historical relationship, the latest reading is consistent with 1.9% annualized real GDP growth, indicating that overall economic activity continues to expand despite growing uncertainty over monetary policy and the outlook for employment.
Beneath the steady headline, however, the report revealed a more mixed picture. The Employment Index dropped sharply to 47.4 from 51.2, slipping back into contraction after just one month of growth. Survey respondents pointed to modest workforce reductions, with some firms citing AI adoption while others continued shifting jobs to lower-cost overseas locations. The weaker employment reading follows softer ADP payroll data earlier in the day, reinforcing signs that hiring momentum in the US economy is cooling.
Inflation pressures, meanwhile, moved in the opposite direction. The Prices Index climbed to 70.3, up from 67.7, marking the 110th consecutive month of rising input costs and lifting its 12-month average to the highest level since April 2023. The combination of resilient activity, softer hiring and firmer prices leaves the Federal Reserve with a familiar policy dilemma. While slowing employment supports the case for patience, persistent cost pressures are likely to keep policymakers cautious about declaring victory over inflation.
Data Summary
| Indicator | July 2026 | June 2026 | Trend |
|---|---|---|---|
| ISM Services PMI | 54.1 | 54.0 | ▲ Slight improvement |
| Market Expectation | 54.2 | — | Slight miss |
| Business Activity | 59.1 | 55.4 | ▲ Strong acceleration |
| New Orders | 57.2 | 55.1 | ▲ Demand strengthened |
| Employment | 47.4 | 51.2 | ▼ Back to contraction |
| Prices Paid | 70.3 | 67.7 | ▲ Inflation pressures intensified |
| New Export Orders | 52.0 | 50.4 | ▲ Faster expansion |
| Imports | 51.8 | 49.4 | ▲ Returned to growth |
| Backlog of Orders | 50.9 | 54.9 | ▼ Growth slowed |
| Supplier Deliveries | 52.8 | 54.4 | ▼ Delivery delays eased |
Key Takeaways
- ISM Services PMI edged up to 54.1 in July, signaling a 25th consecutive month of expansion and pointing to 1.9% annualized real GDP growth according to ISM’s historical relationship.
- Business activity (59.1) and new orders (57.2) accelerated, indicating demand across the services sector remained healthy despite a softer macro backdrop.
- The Employment Index dropped sharply to 47.4, slipping back into contraction after one month above 50 and reinforcing earlier signs from the ADP report that labor demand is cooling.
- Survey respondents cited AI adoption, workforce reductions and continued hiring shifts to lower-cost overseas locations as factors behind weaker employment.
- The Prices Paid Index jumped to 70.3, marking the 110th consecutive month of rising input costs and its highest 12-month average since April 2023.
- The report delivers a mixed signal for the Fed: solid economic activity argues against recession concerns, while weaker hiring supports patience, but stronger price pressures keep inflation risks alive.
