Services Sector Grew in July, But Prices Paid Hit 70.3 and Employment Sub-Index Shrank

The Institute for Supply Management's nonmanufacturing index rose slightly to 54.1 in July from 54.0 in June, according to data reported by Reuters. Anything above 50 means growth. The services sector covers more than two-thirds of U.S. economic activity, so this is the number that matters most for reading the real economy right now.

New orders jumped hard, from 55.1 in June to 57.2 in July. Reuters reported that's likely tied to businesses front-loading purchases to dodge shortages and price spikes stemming from the Middle East conflict. Exports added to the strength too. That's a demand signal, and it's a strong one.

Backlog order growth slowed considerably, and supplier deliveries slipped to 52.8 from 54.4. A reading above 50 on that gauge means deliveries are getting slower, not faster. Businesses are ordering more than the supply chain can comfortably handle.

That's showing up in prices. The survey's measure of prices paid by businesses for inputs jumped to 70.3 from 67.7 in June, per Reuters. It suggests the brief inflation cooldown tied to falling energy prices, after the U.S.-Iran ceasefire, could be reversing.

Economists cited by Reuters warned underlying inflation could stay elevated even with lower oil prices, largely because of the ongoing AI spending boom pulling resources and demand into the economy. Data centers, chips, power demand: all of it competes for the same inputs everyone else needs.

The employment picture is the ugly part

The employment sub-index dropped to 47.4 from 51.2 in June. That's contraction. Reuters noted this gauge has now contracted in four of the last five months. This specific ISM employment measure has a bad track record predicting the government's actual services payroll numbers, so don't treat it as gospel. But four out of five months in the red is significant.

Economists describe the broader labor market as stuck in "slow-hire, slow-fire" mode, according to Reuters. Companies aren't mass-firing, but they're not hiring much either. That's arguably fine for the Fed's inflation fight, since a cooling labor market takes pressure off wage-driven price growth. It's less fine if you're one of the people trying to find a job right now.

A Conference Board survey referenced by Reuters found the share of consumers calling jobs "plentiful" dropped in July to its lowest level since February 2021. That's a five-year low in how workers feel about the job market.

The Fed's bind

The Federal Reserve left its benchmark rate unchanged in the 3.50%-3.75% range last week, per Reuters. Three committee members dissented, wanting a quarter-point hike instead. When three voting members want to raise rates while the majority holds steady, it means the inflation data, including today's 70.3 prices-paid reading, is genuinely dividing expert opinion on how serious the AI-and-tariff-driven price pressure really is.

That dissent matters. It's a fair signal that the case for holding rates isn't unanimous even among the people with the best access to the data. Anyone arguing the Fed is being too dovish on inflation has three sitting governors backing that instinct.

A Reuters survey of economists projected Friday's government employment report would show nonfarm payrolls up by 80,000 in July, following a 57,000 gain in June, with unemployment holding at 4.2%. These are estimates, not results. This ISM report was one of the last major data points ahead of that release, and it cuts both ways: strong demand, but a shrinking employment signal within the sector that drives most of the economy.

What happens Friday when the actual payrolls number lands will tell us whether the ISM's employment contraction is a real warning sign or just another indicator that doesn't line up cleanly with the government's official count.