U.S. Services Sector Stalls in July as Employment Weakens and Costs Soar

5 August 2025

A Reuters analysis of the Institute for Supply Management’s July services report reveals that the U.S. service sector the largest component of the economy—barely expanded last month, a worrying signal for growth as both job activity and cost pressures intensify. The ISM non-manufacturing PMI slipped to 50.1 in July, down from 50.8 in June and well below expectations of 51.5, indicating a sector hovering at the threshold of expansion.

New orders barely budged, sliding marginally from 51.3 to 50.3, while export orders contracted for the fourth time in five months, reinforcing concerns around weak overseas demand. Employment registered a further decline as the index dropped to 46.4, marking its fourth contraction in five months and aligning with disappointing July job creation and downward revisions of nearly 258,000 jobs for May and June.

At the same time, the ISM’s prices‑paid index soared to 69.9 the highest reading since October 2022 signaling mounting inflation risks at a time when businesses had hoped cost pressures were easing. From sectors such as healthcare to transportation, supply chain and tariff effects continue to ripple through operations, raising concerns about looming stagflation.

Market reaction was swift. Wall Street pared earlier gains as headlines flashed across investors’ screens, with the Dow down around 0.1%, the S&P 500 edging lower, and the Nasdaq modestly positive. Firms such as Palantir and Pfizer lifted sentiment through upbeat earnings outlooks, but soft data dominated the narrative.

Meanwhile, trader expectations shifted sharply. With employment data weakening and inflation persisting, markets raised the odds of a Federal Reserve rate cut in September to 90 percent or higher. However, dissent among Fed officials including two recent votes for immediate easing highlighted growing debate over balancing labor softness with inflation risks.

This slowdown arrives amid a flurry of tariff activity. With new duties set to raise the U.S. average import tariff rate to 18.3 percent by August 7 its highest level since the 1930s businesses across industries face growing uncertainty. Companies operating in construction, logistics and healthcare report delays in projects, revised contracts, and rising input costs.

Economists warn that the convergence of rising input costs, falling job creation, and weaker service activity may portend a sharper slowdown in the economy. While businesses have drawn on inventory buffers to soften initial price impact, further price hikes in categories like home furnishings suggest that the pace of inflation may accelerate in coming months.

Reuters

On Capitol Hill, the firing of the Bureau of Labor Statistics commissioner by President Trump amid repeated job number revisions has stirred concerns over data credibility. Experts warn that undermining public statistical institutions could impair economic decision-making and investor confidence in the months ahead.

Despite this, the U.S. economic narrative remains ambiguous. A mild slowdown might justify rate cuts and offer opportunity for AI-fueled sectors still tracking higher growth, while deeper labor weakness could trigger recession risks. For now services activity stands as a key marker of economic health: profitable until now, but clearly under tension.