The United States service sector maintained a solid growth pace in July, showing that consumer demand and business activity remained resilient at the beginning of the third quarter. However, the same report also revealed a less comfortable combination of rising input costs, slower supplier deliveries and renewed weakness in hiring.
The Institute for Supply Management’s Services Purchasing Managers’ Index increased marginally to 54.1 in July from 54.0 in June. Any reading above 50 indicates expansion, and July marked the sector’s 25th consecutive month in growth territory. Services account for more than two-thirds of US economic activity, making the monthly survey an important indicator of the wider economy’s direction. The complete results are available in the official July 2026 ISM Services PMI report.
New Orders Point to Strong Demand
The headline index barely changed, but several components beneath it showed a meaningful acceleration.
ISM’s Business Activity Index climbed from 55.4 in June to 59.1 in July. This was its second-highest reading since May 2024 and indicated that service companies were operating at a substantially faster pace than during the previous month.
The New Orders Index also rose sharply, increasing from 55.1 to 57.2. New orders have now expanded for 14 consecutive months, suggesting that demand entered the third quarter with considerable momentum. Backlogs continued growing as well, although the Backlog of Orders Index declined from 54.9 to 50.9, showing that companies were accumulating unfinished work at a slower rate.
The figures suggest that households and businesses were still purchasing services despite higher borrowing costs and geopolitical uncertainty. Retail trade, construction, information, transportation and warehousing, finance and insurance, and accommodation and food services were among the 13 industries reporting growth in July. Four service industries reported contraction.
Demand may also have received temporary support from the recently concluded FIFA World Cup. Purchasing managers referenced the tournament when discussing stronger business activity and new orders, particularly in sectors connected with travel, hospitality, entertainment and retail spending.
Businesses May Still Be Ordering Ahead of Disruptions
Not all of the increase in orders necessarily represents ordinary underlying demand. Some businesses may have accelerated purchases to protect themselves against future shortages, transportation problems or higher prices.
The conflict in the Middle East and its effects on energy markets and international supply chains have encouraged companies to secure products earlier than usual. This front-loading can temporarily strengthen new orders because businesses purchase today what they otherwise would have ordered later.
The ISM report noted that tariffs and the Middle East conflict were still being mentioned by respondents, although less frequently than in earlier surveys. Companies also described extending ordering windows because some materials required longer lead times.
Export demand strengthened alongside domestic orders. The New Export Orders Index increased to 52.0 from 50.4, while imports returned to expansion at 51.8 after registering 49.4 in June. These figures indicate that international activity contributed to July’s expansion, although export and import indexes cover a smaller share of survey respondents than the broader business-activity measures.
Rising Prices Are the Report’s Biggest Warning
The most concerning figure was the Prices Index, which rose from 67.7 in June to 70.3 in July. This was the fourth time in five months that the index exceeded 70, and it marked the 110th consecutive month in which service organisations reported increasing prices for materials and other inputs.
A reading above 70 does not mean that prices increased by 70 percent. The index measures the proportion of purchasing managers reporting higher prices compared with those reporting lower prices. A high reading indicates that cost increases are widespread across the sector.
Businesses reported higher prices for products and services including fuel, labour, beef, computers, paper and software licensing. Transportation and warehousing companies said fuel and labour were important drivers, while utilities faced intense competition for limited production capacity for electrical materials. Some smaller suppliers were reportedly experiencing financial stress, resulting in delayed or missed shipments.
These pressures matter because service businesses may eventually pass additional costs to customers. Restaurants can raise menu prices, transport companies can increase fees, and professional-service providers can adjust their rates. That creates a risk that inflation remains elevated even when oil prices or other individual commodities retreat.
Suppliers Are Still Struggling to Keep Up
The Supplier Deliveries Index declined from 54.4 to 52.8. Unlike most PMI components, a reading above 50 in this index means deliveries are becoming slower rather than faster.
The decline from June indicates that delivery delays became slightly less severe, but the index remained above 50 for the 20th consecutive month. Companies continued reporting shortages involving materials such as aluminium, steel, electronic components and memory components.
Slower deliveries can reflect strong demand because suppliers receive more orders than they can process efficiently. However, they may also result from production constraints, labour shortages, transportation problems or financial difficulties among smaller vendors.
The July survey showed evidence of both conditions. Service companies were placing more orders, while parts of the supply network were still struggling to deliver materials at the required speed.
Stronger Activity Did Not Produce More Hiring
The employment component delivered a very different message from the demand indicators.
ISM’s Employment Index fell from 51.2 in June to 47.4 in July, returning to contraction after expanding for only one month. The index has now remained below 50 in 12 of the past 18 months and reached its lowest level since March.
The decline does not prove that the US service sector eliminated jobs during July. The ISM employment measure has not consistently predicted the government’s official monthly payroll figures. It does, however, indicate that surveyed businesses were generally cautious about expanding their workforces.
Some companies linked reduced staffing needs with artificial-intelligence implementation. Others appeared reluctant to hire because of higher energy, labour and material costs or uncertainty surrounding future demand. Reuters reported that separate ADP data showed private payrolls increasing by only 44,000 in July, below economists’ expectations and down from the revised June gain.
This combination of strong output and weak hiring may indicate that companies are producing more with their existing employees. It may also suggest that managers are delaying recruitment until the outlook for inflation, interest rates and operating costs becomes clearer.
The Federal Reserve Faces an Uncomfortable Combination
The ISM report presents the Federal Reserve with two competing signals. Strong new orders and business activity suggest that the economy is not in immediate danger of a major slowdown. However, the jump in prices indicates that inflationary pressure may be rebuilding.
The Federal Reserve held its target interest-rate range at 3.50 percent to 3.75 percent on July 29. Three voting members preferred a quarter-point increase, while the official statement said economic activity remained solid and inflation was still elevated relative to the central bank’s 2 percent objective. The decision and vote are detailed in the Federal Reserve’s July policy statement.
A strong service sector gives policymakers less reason to reduce borrowing costs quickly. The rise in input prices may instead strengthen arguments for keeping rates elevated or raising them if broader inflation data confirm that price pressure is spreading.
The weak employment index complicates that view. Aggressive rate increases could place additional pressure on hiring, construction and other interest-sensitive activity. The Fed must therefore determine whether July’s price increase represents a temporary supply shock or the beginning of more persistent inflation.
The Service Economy Remains Resilient, but the Balance Is Shifting
July’s data show an economy that continued to expand rather than one moving toward recession. Business activity accelerated, new orders strengthened and most service industries reported growth. ISM estimates that the July reading was consistent with continued expansion in the wider economy.
The report is not entirely reassuring. Businesses are paying more for inputs, suppliers are still delivering slowly and employment has returned to contraction. These conditions can coexist for a period, particularly when companies use productivity improvements to meet demand without adding workers.
The central question is whether strong orders can continue once temporary influences such as advance purchasing and World Cup spending fade. If demand remains strong while supply constraints persist, inflation could stay elevated. If hiring weakness eventually reaches household income and consumer confidence, service-sector growth could lose momentum later in the year.
For now, the US service economy remains one of the strongest parts of the broader expansion. July’s report confirms that growth is holding up, but it also shows that maintaining that pace without reigniting inflation is becoming increasingly difficult.
