The American service economy is still growing. It just isn't hiring anymore — and it's paying more for everything it buys.
The Institute for Supply Management said Wednesday its Services PMI registered 54.1% in July, a marginal increase of 0.1 percentage point from June's 54% and the 25th consecutive month of expansion. Economists had looked for 54.5%. The headline miss was small. What sat underneath it was not.
Demand Is Accelerating
The report's growth components were unambiguously strong. The Business Activity Index surged 3.7 percentage points to 59.1% from 55.4% in June. New Orders climbed 2.1 points to 57.2%.
"In July, the Services PMI registered 54.1 percent, an increase of 0.1 percentage point compared to June's figure of 54 percent," said Steve Miller, chair of the ISM Services Business Survey Committee. By ISM's own translation, a 54.1% reading corresponds to real GDP growth of roughly 1.9% on an annualized basis.
Miller described the sector as resilient. Notably, panelists mentioned tariffs and the Middle East conflict far less frequently than in recent months.
Employment Fell Back Into Contraction
The Employment Index dropped 3.8 points to 47.4%, sliding back below the 50 breakeven line after just one month in expansion territory. Readings under 50 signal outright contraction.
The reasons respondents gave are the striking part. Firms cited AI adoption, deliberate workforce reductions, and continued shifting of hiring to lower-cost overseas locations. That is a very different explanation than weak demand — new orders at 57.2% argue demand is fine. Companies are meeting stronger order books without adding headcount.
That reading lands the same morning ADP reported private employers added just 44,000 jobs in July, the weakest month since January, against forecasts near 70,000. Two independent surveys now point in the same direction.
Prices Are Going the Wrong Way
The Prices Index rose to 70.3% from 67.7%, marking the 110th consecutive month of rising input costs. The index's 12-month average is now at its highest level since April 2023.
Miller attributed much of the pressure to the recent run-up in oil prices still working its way through supply chains. Panelists echoed it. "Conditions are largely unchanged from last month," a Transportation and Warehousing respondent said. "The exception is pricing, which continues to rise, driven mainly by fuel and labor costs. Demand remains stable." A Wholesale Trade panelist reported tighter lumber supply alongside freight rate and availability challenges.
What It Means for the Fed
A central bank facing softening employment usually cuts. A central bank facing accelerating input costs usually doesn't. July's services report delivered both at once.
Prediction markets are leaning toward inaction — and, remarkably, toward tightening over easing. For the September 16 FOMC meeting, odds sit near 52% for no change and roughly 46% for a 25 basis point hike, with a cut priced at just 2%.
The next test arrives Friday, when the Bureau of Labor Statistics releases the July employment situation at 8:30 a.m. ET. Nonfarm payrolls are forecast at 80,000 against June's 57,000, with the unemployment rate expected to hold at 4.2% and average hourly earnings up 3.5% year over year.
Equities have so far shrugged. The S&P 500 and Dow closed at records Tuesday, at 7,736.52 and 54,085.88 respectively, before stalling Wednesday as traders weighed earnings and oil near $75 a barrel.
Sources: Institute for Supply Management (July 2026 Services PMI Report via PR Newswire), CNBC, ING Think, ActionForex, TheStreet, Continuum Economics