U.S. Services Sector Growth Accelerates Slightly in July, ISM Data Shows

Services PMI Edges Up to 54.1 as Activity and Orders Strengthen

The U.S. services economy expanded at a slightly faster pace in July, according to the Institute for Supply Management’s latest survey. The headline Services PMI rose 0.1 percentage point to 54.1, extending the streak of expansion to 25 consecutive months. Any reading above 50 signals growth. The broader economy has now grown for 74 straight months. The July figure sits 0.7 points above the 12-month average of 53.4, with February’s 56.1 and September 2025’s 50.3 marking the high and low over that period.

Thirteen of the 18 services industries tracked reported growth. Retail Trade, Transportation & Warehousing, Wholesale Trade, and Information led the expansion. Construction and Accommodation & Food Services also grew. Four sectors contracted: Agriculture, Forestry, Fishing & Hunting; Other Services; Health Care & Social Assistance; and Real Estate, Rental & Leasing.

The underlying sub-indexes painted a mixed picture. The Business Activity index jumped 3.7 points to 59.1, indicating robust current operations in 13 industries. New Orders rose 2.1 points to 57.2, the fourth-highest reading in 26 months, pointing to strong future demand. But the Employment gauge fell 3.8 points to 47.4, contracting for the fourth time in five months, with only seven sectors adding jobs. Supplier Deliveries eased to 52.8, still showing slower deliveries but at a decelerating pace.

Panelist comments underscored persistent price pressures. A transportation and warehousing respondent said pricing continues to rise, driven by fuel and labor costs. A wholesale trade contact noted lumber supply is tighter and freight rates are a challenge, though the outlook for the remainder of 2026 is favorable. Steve Miller, chair of the ISM Services Business Survey Committee, described the numbers as “really good” and noted the current stretch resembles post-pandemic 2002. He linked the employment weakness to the ability to meet order volume with existing staff, and flagged petroleum-related costs, observing that oil remains about $20 a barrel above January levels.

Beneath the Headline: Hiring Stalls While Prices Stay High

Resilient Demand Meets an Employment Anomaly

The divergence between surging new orders and weakening employment is the most striking feature of this report. With the New Orders index at 57.2 and backlog not explicitly breaking out, the data suggest businesses are meeting demand with current headcount. Miller pointed to an eight-point shift toward more companies in expansion than contraction, yet hiring remains stalled. If productivity gains—potentially aided by AI or process improvements—are allowing firms to boost activity without adding workers, this could be a positive structural shift. However, if the reluctance to hire stems from uncertainty over tariffs or cost structures, it may signal fragility beneath the headline PMI strength.

Price Pressures That Won’t Go Away

Input cost inflation remains a headache for service providers. Panelists repeatedly cited fuel, labor, and freight as upward price drivers. The oil price, about $20 a barrel higher than in January, is a direct headwind for transportation- and construction-heavy firms. While the Supplier Deliveries index eased slightly, it remains above 50 (indicating slower deliveries), which often reflects both demand and supply-chain friction. For companies unable to pass these costs on, margin compression is a real risk, especially in sectors like retail and building materials where customers are pushing back hard on price increases.

Tariff and Trade Friction Keep Uncertainty Alive

Commentary mentioned tariffs specifically, and the reported tightness in lumber supply hints at lingering cross-border or trade-related bottlenecks. These elements, though not yet overwhelming, introduce an unpredictable variable into planning. A wholesale trade respondent noted that business is more robust than expected despite “economic headwinds,” suggesting many firms are navigating the environment better than feared, but the potential for an abrupt tariff escalation or material shortage remains a wildcard for the services sector’s growth trajectory.

What the July Data Means for Business Strategy and Cost Management

For services-sector executives and business owners, the July ISM data points to three immediate priorities:

• With new orders at 57.2 and business activity at 59.1, companies should scrutinize whether current staffing levels are truly adequate. The employment index of 47.4 suggests many peers are holding off on hiring; make sure your own organization isn’t letting backlogs build dangerously while assuming productivity alone will handle the volume.
• Firms heavily dependent on fuel and freight—particularly in transportation, warehousing, and construction—should review supply contracts or hedging strategies now. Panelists confirm fuel and freight costs are climbing, and oil remains roughly $20 a barrel above January levels, pressuring margins for those who haven’t locked in pricing.
• Leaders in the four sectors that contracted (health care, real estate, agriculture) should assess whether their industry-specific data matches the national PMI narrative. If demand signals are weakening, prompt adjustments to capacity or marketing may be necessary; if the contraction is temporary, prepare to capture demand when conditions improve.