Unforeseen gloom prevails within the service industry.
In July 2025, the U.S. services sector experienced an unexpected deterioration, as indicated by the Purchasing Managers' Index (PMI) from the Institute for Supply Management (ISM). The PMI, a key economic indicator, registered a reading of 50.1 points, just barely above the growth threshold of 50 points [2][3][4]. This reading was lower than economists' anticipated increase to 51.5 points and signals near-stagnant growth for the services sector.
The ISM Services PMI®, often considered a more authoritative gauge of U.S. services sector activity, points to several potential headwinds for the economy. The employment indicator signaled a more pronounced job reduction in July, with contraction in the Employment Index suggesting firms are still cautious about hiring amid economic uncertainty [2][3][4].
Inflation pressures are another concern, with the paid prices indicator unexpectedly rising in July, indicating elevated inflationary pressures. Input costs are rising, and companies are passing these on in output prices, squeezing margins and consumer affordability [2][3][4].
Trade tensions also appear to be impacting the services sector, as new export orders declined, reflecting ongoing global trade tensions [2][3][4]. This, coupled with the resulting supply chain challenges, could further hinder the sector's growth.
Ralf Umlauf, economist at Helaba, commented on the services sector PMI being just above the growth boundary, stating that economic concerns are more pronounced due to this weak showing [4].
However, it's important to note that the S&P Global US Services PMI suggests some pockets of resilience. The index rose sharply to 55.7 in July from 52.9 in June, marking the sharpest growth in private services activity since the start of the year [1]. New business increased despite weaker foreign demand, and firms raised employment at the fastest pace since January.
Despite the strong expansion suggested by the S&P Global US Services PMI, the overall picture for the U.S. services sector remains complex and nuanced. The divergence between the two major PMI reports underscores the challenges faced by certain firms and niches, particularly those exposed to international trade frictions [1].
In response to these economic challenges, the U.S. Federal Reserve's monetary policy is likely to reinforce expectations of easing in September and throughout the rest of the year [5]. This could provide some relief for the struggling services sector, but the outlook remains uncertain, with potential headwinds for job creation and renewed inflation challenges in the near term.
References:
- S&P Global US Services PMI
- ISM Services PMI®
- U.S. Services Sector Contracts Amid Trade Tensions
- U.S. Services Sector Growth Slows Amid Weak Employment and Rising Prices
- Fed Expectations of Easing in September and Beyond
The Federal Reserve's monetary policy, aimed at easing in September and throughout the year, could potentially offer relief for the struggling U.S. services sector [5]. However, economic challenges such as elevated inflationary pressures, potential job losses, and ongoing trade tensions continue to pose headwinds for the sector's growth, both in terms of business activity and financing [2][3][4].
