Activity across the U.S. services sector grew slightly faster in July, indicating that a major part of the American economy remains resilient.
The sector continued to expand despite uncertainty surrounding tariffs, geopolitical tensions, and rising energy costs.
ISM Services Index Signals Continued Expansion
The Institute for Supply Management’s services purchasing managers’ index increased to 54.1 in July from 54.0 in June.
However, the reading came in below the 54.5 forecast by economists.
Any figure above 50 indicates expansion. The services industry is especially important because it accounts for roughly two-thirds of U.S. economic activity.
Tariffs and Middle East Tensions Remain Concerns
Businesses participating in the ISM survey continued to mention the conflict in the Middle East and uncertainty over White House tariff policies.
However, references to these challenges appeared less frequently than in previous reports.
This may suggest that companies are becoming more accustomed to the uncertainty or that the immediate impact has been less severe than initially feared.
Higher Energy Costs Add to Inflation Risks
Inflation and elevated mortgage rates remained important concerns for services companies.
The ISM said the economy was experiencing pricing effects linked to the recent increase in petroleum costs.
Oil supply disruptions from the Middle East have pushed energy prices higher. These increases have raised concerns that inflation could accelerate again.
Persistent inflation could also encourage the Federal Reserve to consider further interest-rate increases.
Prices Paid Index Jumps Above Expectations
The ISM prices paid index rose sharply to 70.3 in July.
This marked the fourth time in five months that the indicator had exceeded 70. Economists had expected the index to fall to 65.0 from 67.6 in June.
A higher prices paid reading indicates that services companies are facing stronger cost pressures.
The index’s 12-month average has now climbed to 68.1, its highest level since April 2023.
New Orders Show Stronger Demand
Despite rising costs, the new orders index delivered a more positive signal.
The measure increased to 57.2 from 55.1 in June, exceeding market expectations.
Stronger new orders suggest that demand for services remains healthy and could support continued economic growth in the coming months.
World Cup Supports Business Activity
Companies also identified the FIFA World Cup as a factor supporting activity and new orders.
Major sporting events can increase demand across several industries, including tourism, hospitality, transportation, advertising, and entertainment.
This additional demand may help explain part of the improvement in services activity during July.
Federal Reserve Outlook Remains in Focus
The latest ISM report presents a mixed picture for the U.S. economy.
Services activity and new orders remained firmly in expansion territory. However, the sharp increase in prices paid suggests that inflationary pressures remain a significant risk.
Federal Reserve officials will likely monitor upcoming employment and inflation reports before deciding whether further monetary tightening is necessary.
For now, the U.S. services sector continues to grow, but higher energy costs and persistent price pressures could complicate the economic outlook.
