U.S. Services Sector Kept Growing in June, but the Iran War and Drought Are Squeezing Costs

Services Economy: Still Growing, Not Booming

The U.S. services sector expanded for another month in June, according to two separate surveys released Monday, July 6. The S&P Global U.S. Services PMI rose from 50.7 in May to 51.2 in June, just under the 51.3 flash estimate. The ISM Services PMI came in at 54.0, down slightly from 54.5 in May but in line with analyst expectations.

Anything above 50 signals expansion. Both readings cleared that bar. Neither suggests the economy is booming.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, described June's result as "a slight acceleration of business growth" that represents "the strongest since the outbreak of the war in the Middle East." He immediately tempered that: the pace of growth "remains lacklustre compared to that seen at the start of the year before the conflict."

S&P Global's survey data imply the economy grew at roughly a 1.2% annualized rate in the second quarter. That is expansion, but it does not signal economic health.

What Businesses Are Actually Saying

The ISM survey includes verbatim responses from purchasing managers, and those comments are blunter than any PMI number.

One Accommodation and Food Services respondent warned: "We continue to experience higher prices due to the Persian Gulf conflict through rising diesel fuel costs and increased input costs for resin-based packaging. The brunt of the impact will be experienced in Q3 of 2026, but we are feeling the impact now. Suppliers are aggressively attempting to pass through price increases."

An Agriculture respondent painted an even grimmer picture. Extreme drought in Virginia has devastated spring crops. The barley grain crop was described as "nearly totally lost" due to early hot weather and a spring freeze. High fertilizer costs, driven up by the war in Iran, combined with elevated freight costs have pushed crop expenses above breakeven for many farms. Dairy farmers face the double hit of forage shortages and milk prices below the cost of production.

The respondent said the combined stress has resulted in "decreased spending in the agricultural sector."

These are supply-side cost pressures. They do not show up immediately in PMI headline numbers, but they are real, and the purchasing managers living through them are warning the worst hits land in Q3 2026.

The Strongest Counterargument

A fair reading of this data supports a more optimistic interpretation. Services expansion has now held above 50 for an extended stretch, and the ISM's headline print came in exactly where analysts expected. The Federal Reserve has been trying to engineer a soft landing, and a 54.0 ISM Services read is closer to that outcome than a contraction reading would be. Businesses worried about Q3 costs may be front-running problems that do not fully materialize. Forecasting supply-chain shocks is notoriously unreliable, and prior warnings of war-driven inflation waves have sometimes proven overblown.

That said, the purchasing managers filling out these surveys are the ones actually buying diesel, resin, barley, and feed. Their on-the-ground read carries weight.

What Comes Next for the Fed

The timing matters. The FOMC minutes from the June meeting are scheduled for release on Wednesday, July 8. That meeting was the first under Fed Chair Kevin Warsh's leadership, making the minutes unusually scrutinized.

Also this week: Fed Governor Christopher Waller is speaking today (Monday), and New York Fed President John Williams and Dallas Fed President Lorie Logan are scheduled to speak Thursday. Those remarks will give markets a more current read on where Fed thinking sits than a document from a meeting weeks ago.

Business growth expectations for the year ahead improved in June but remain "subdued compared to that seen prior to the war," per S&P Global, because businesses lack clarity on both economic and geopolitical conditions. The Fed will be weighing those same uncertainties when deciding whether the Q3 cost pressures the ISM respondents are flagging warrant a policy response, or whether the current expansion pace holds without intervention.

The unresolved question heading into Wednesday's FOMC minutes: whether the Fed views a 1.2% annualized growth rate and persistent war-driven input cost pressures as a reason to hold rates steady, cut to support growth, or hold specifically because those input costs could re-accelerate inflation in Q3.