July Services PMI: Solid Expansion Masks Hiring Weakness

The U.S. services economy maintained its momentum in July, according to the Institute for Supply Management's latest report. The Services PMI registered 54.1, a slight 0.1-point increase from June and the 25th consecutive month above the 50.0 threshold that separates expansion from contraction. The broader economy has now grown for 74 months in a row, underscoring the sector's resilience.

The headline figure concealed sharp divergences beneath the surface. Business activity accelerated dramatically, rising 3.7 points to 59.1—the fastest pace in recent months. New orders also climbed to 57.2, the fourth-highest reading in 26 months. Yet the employment index slumped 3.8 points to 47.4, contracting for the fourth time in five months. Supplier deliveries slowed again (52.8), indicating persistent logistical friction.

Thirteen of the 18 services industries tracked expanded in July, led by Retail Trade, Transportation & Warehousing, and Wholesale Trade. By contrast, Agriculture, Forestry, Fishing & Hunting; Health Care & Social Assistance; and Real Estate were among the four sectors reporting contraction. Panelists highlighted rising fuel and labor costs, with a wholesale trade respondent noting tighter lumber supply and freight challenges. An overall favorable outlook for late 2026 remains intact.

ISM survey chair Steve Miller compared the recent string of solid PMI readings to the post-pandemic strength of 2002 and suggested that firms are managing order volumes without adding staff. "If you are able to keep up with backlog and the order volume with the people you have, then you don't hire," Miller said, while also pointing to petroleum-related product prices that are still $20 a barrel above January levels.

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Inside the PMI: Why Strong Orders Aren't Boosting Jobs

The New Orders–Employment Divergence: A Productivity Signal?

July's new orders print of 57.2 was robust, yet businesses are not translating that demand into hiring. ISM's Miller linked the phenomenon to manageable order backlogs: companies are meeting demand with existing headcount, possibly aided by productivity gains. He hinted that factors such as AI development could be enabling firms to do more with less. However, this tightrope could become strained if order volumes continue to rise and the employment index remains in contraction territory for an extended period.

Transportation and Fuel: Solid Demand, Stubborn Cost Pressure

The Transportation & Warehousing sector expanded again, but panelists flagged rising fuel and labor costs as a persistent headwind. Miller noted that petroleum-related commodity prices remain approximately $20 per barrel above January levels, directly elevating the cost of doing business. While demand is stable, the ability of logistics firms to pass on these costs will be tested, especially as a wholesale trade panelist observed that builders are pushing back hard on price increases. This tension between cost inflation and customer resistance could squeeze margins across supply chains.

Winners and Losers in the Sector Split

Retail, construction, and wholesale trade led the expansion, reflecting resilient consumer spending and business investment. In contrast, Real Estate contracted, likely pressured by higher interest rates and cautious capital deployment. Health Care & Social Assistance also shrank, a noteworthy signal given the sector's recent labor struggles. Agriculture's contraction may be tied to commodity price volatility. The breadth of growth—13 sectors expanding—suggests the U.S. services economy remains broad-based, but the handful of industry-specific headwinds warrants attention.

What Business Leaders Should Do Now

  • Retailers and wholesalers: With New Orders at 57.2 and panelists confirming robust demand, expect sustained volumes through Q3 2026. The wholesale trade respondent's mention of freight rate challenges and lumber tightness means logistics costs require active margin management—reevaluate supplier contracts and fuel surcharge pass-throughs.
  • Transportation firms: While demand is steady, fuel costs are $20 per barrel above January levels per ISM data. Audit route efficiency and consider locking in fuel hedges if exposure is high, as panelists indicate difficulty passing on all cost increases to customers.
  • Firms in contracting sectors (Real Estate, Health Care, Agriculture): Despite a 25-month overall services expansion, your industries are shrinking. Real estate businesses should quantify whether weak demand or high financing costs are the primary drag. Healthcare providers face a combination of labor cost pressures and soft activity—staffing levels may need recalibration to match reduced volumes.
  • All service sector employers: The Employment Index of 47.4 paired with manageable backlogs suggests you can delay hiring. Instead, invest in technologies or process improvements that boost output per worker, as ISM's Miller implied many firms are already doing.