It was a disappointing and ugly Institute for Supply Management Services report for July. Stagflationary impacts already appear to be rocking the services sector to a greater extent than previously anticipated. This is bad news for the health of the economy, as more than 80% of all jobs come from the services sector, and this expansion will live or die on the ability of services businesses and industries to buck growing tariff headwinds coming from the manufacturing sector.
The ISM Services index unexpectedly pulled back to a stagnant 50.1 from 50.8 in June, barely above the 50.0 level that marks the difference between expansion and contraction. This is a totally different view of service sector strength than what we got from the July S&P Global US Service PMI this morning, which was revised up to a robust 55.7 from a previously reported 55.2. We saw big drops in indexes for inventories (-3.9) new export orders (-3.2), new orders (-1.0), business activity (-1.6), and employment (-0.8). Ominously, imports, employment, and new export orders fell deeper into contraction territory last month.
The latest reading on service sector inflation pressures wasn’t any better, and actually looked worse than the business activity side of the leger. The prices paid index skyrocketed 2.4 points to 69.9, its highest level since October 2022.
Bottom-line: This ISM Services report for July reinforces the message we got from the July Employment report on Friday that economic activity and job growth are sputtering under the weight of higher tariffs, increasing inflation, and rising economic policy and trade uncertainty. This report adds to the evidence that the Federal Reserve is stuck in a stagflationary bind but will likely soon need to look through rising prices to help support a deteriorating labor market by cutting interest rates.
