The US service sector continued to expand in July, with business activity and new orders picking up noticeably. However, a key employment indicator fell back into contraction territory, while input price pressures intensified further. This suggests the overall service sector remains resilient, but uncertainties persist regarding business hiring and the inflation outlook.
The Institute for Supply Management (ISM) reported on Wednesday that its Services PMI for July registered 54.1%, a slight increase of 0.1 percentage points from June's 54.0%. This marks the 25th consecutive month of expansion and is above the 12-month average of 53.4%. A reading above 50% indicates expansion in the service sector. The ISM noted that a Services PMI consistently above 48.1% typically signals growth in the broader US economy. Based on historical relationships, July's 54.1% reading corresponds to an annualized US real GDP growth rate of approximately 1.9%, suggesting the overall economy has been expanding for 74 consecutive months.
Looking at key sub-indices, service sector demand and business activity improved markedly. The Business Activity Index surged to 59.1% in July, up a substantial 3.7 percentage points from June's 55.4%, marking the second-highest level since May 2024 and exceeding the 12-month average of 55.6%. The New Orders Index rose to 57.2%, a 2.1 percentage point increase from the prior month, marking its 14th consecutive month in expansion and reflecting robust order demand. Some survey respondents cited the release of new fiscal year budgets, the launch of large summer projects, and demand related to the World Cup as drivers of increased business activity and new orders.
In contrast, the labor market showed a significant weakening. The Employment Index fell to 47.4% in July, a sharp drop of 3.8 percentage points from June's 51.2%. After just one month of expansion, it returned to contraction territory and reached its lowest level since March. The index has been below 50% in 12 of the past 18 months, indicating that service sector firms remain cautious in their hiring. Some businesses reported modestly reducing their workforce, with a portion of these cuts attributed to the application of artificial intelligence (AI). Other firms noted a decrease in domestic US jobs while increasing hiring in lower-cost regions such as India.
By industry, seven sectors reported employment growth in July, including Utilities, Construction, Retail Trade, Transportation & Warehousing, Wholesale Trade, Information, and Public Administration. Eight industries reported employment declines, including Mining, Finance & Insurance, Healthcare & Social Assistance, Real Estate, Educational Services, and Professional, Scientific & Technical Services.
Price pressures intensified further. The Prices Index climbed to 70.3% in July, up 2.6 percentage points from 67.7% in June. This is the fourth time in the past five months that the index has exceeded 70% and marks the 20th consecutive month above 60%. The 12-month average for the index rose to 68.1%, the highest level since April 2023. Prices paid by service sector firms for materials and services have now increased for 110 consecutive months. In July, 17 industries reported an increase in input prices, with no industries reporting a decline. Items cited as increasing in price include petroleum-related products, plastics, memory products, skilled labor, software licenses and maintenance, transportation, transformers, and switchgear. The ISM noted that recent increases in oil costs continue to impact service sector prices. Firms in the Transportation & Warehousing industry cited fuel and labor costs as the primary drivers of ongoing price increases. Companies in Public Administration and Construction expressed concern that the Iran conflict could further boost building material and project costs through higher oil prices.
On the supply chain front, the Supplier Deliveries Index registered 52.8% in July, down 1.6 percentage points from June. It has been above 50% for 20 consecutive months, indicating that supplier delivery speeds are still slowing. However, the index has declined for three straight months and is at its lowest level since December 2025, suggesting a marginal easing in supply chain delays. Some firms reported that smaller suppliers are facing financial pressure, leading to delayed or missed shipments. Lead times for certain network equipment and electrical conductors remain extended. A retail firm noted that lead times for network access points and switches needed for new store construction are four to six months, requiring them to place large orders well in advance. The report indicated that the number of items in short supply decreased to eight in July from nine in June, but challenges persist for skilled labor, memory components, electronic components, switchgear, electrical cable, and steel products. Some firms are securing supply by extending procurement windows and placing early orders for long-lead-time materials.
The Inventories Index rose to 51.4% in July, a slight increase of 0.2 percentage points from June, marking its sixth consecutive month in expansion. Some firms reported modestly increasing inventory levels to ensure supply security and pre-purchasing long-lead-time materials for future projects. However, the Inventory Sentiment Index was 52.5%, remaining in "too high" territory for the 39th consecutive month, indicating that some companies believe current inventory levels are still high relative to actual business needs. The Backlog of Orders Index fell sharply to 50.9% in July, a drop of 4 percentage points from June, but it still marked its sixth straight month of expansion. This is the longest period of order backlog growth since a 26-month streak that ended in February 2023. The New Export Orders Index rose to 52.0% in July, a 1.6 percentage point increase from June, staying at or above 50% for the sixth consecutive month. Some firms reported increased demand for subscription services and international orders, with key export markets showing resilience despite geopolitical and trade uncertainties. The Imports Index climbed to 51.8% in July from 49.4% in June, re-entering expansion territory and reversing a trend of decline that had persisted since March. Some firms attributed the increase to new product launches and cost advantages from international sourcing, while others mentioned receiving critical equipment like transformers from overseas.
In terms of industry performance, 13 service industries reported growth in July, down one from June. These include Retail Trade, Transportation & Warehousing, Wholesale Trade, Management of Companies & Support Services, Information, Construction, Accommodation & Food Services, Public Administration, Utilities, Educational Services, Mining, Professional, Scientific & Technical Services, and Finance & Insurance. Four industries reported contraction: Agriculture, Forestry, Fishing & Hunting; Other Services; Healthcare & Social Assistance; and Real Estate, Rental & Leasing.
Feedback from survey respondents indicates a mixed business environment across the US service sector. The Finance & Insurance industry noted healthy demand from commercial clients, but firms remain cautious about interest rates and the inflation outlook. Wholesale Trade firms reported that business performance is better than expected despite tightening lumber supply and challenges with freight costs and delivery capacity, and they remain optimistic for the remainder of 2026. Meanwhile, Construction firms reported declining sales despite increased discounts, with cost pressures continuing to mount. Transportation & Warehousing firms described demand as stable, but fuel and labor costs continue to push prices higher. Utilities firms stated that demand for electrical equipment is strong, leading to competition among companies for production slots, with an increasing number of suppliers requiring advance progress payments or deposits from buyers.
Steve Miller, Chair of the ISM Services Business Survey Committee, commented that tariffs and the Middle East conflict are still mentioned by survey respondents, but with significantly less frequency than before. The World Cup was again cited as a factor boosting business activity and new orders. Overall, the US service economy remains resilient, but mortgage rates, inflation levels, and the price impact from recent increases in oil costs are the primary concerns for businesses.
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