US Services Growth Holds Steady Amid Rising Input Costs

The Institute for Supply Management reported its nonmanufacturing purchasing managers index reached 54.1 in July, a slight uptick from 54.0 in June. While 13 industries reported expansion, cost pressures are mounting across the sector. Transportation and warehousing firms cited rising fuel and labor expenses as primary drivers, while other businesses reported that suppliers are increasingly demanding down payments to secure goods. New orders rose to 57.2 from 55.1, fueled by front-loading efforts to mitigate future shortages and heightened business investment in artificial intelligence.

Despite the surge in demand, the sector faces significant operational friction. The index for supplier deliveries slipped to 52.8, as smaller vendors struggle with financial stress and extended lead times for critical components like electrical conductors and memory parts. Simultaneously, the prices paid for inputs climbed to 70.3, up from 67.7 in June, reflecting broad-based increases in costs for items ranging from aluminum and copper to software licensing. This inflationary environment, according to Priscilla Thiagamoorthy of BMO Capital Markets, reinforces expectations for a higher-for-longer interest rate stance from the Federal Reserve.

Employment trends within the sector present a cooling picture, with the ISM employment sub-index falling to 47.4. Some firms attributed this decline to workforce reductions linked to AI implementation. Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, suggests that businesses are tempering hiring as they navigate both energy-related cost pressures and the productivity shifts brought by automation. While private hiring data remains modest, the broader labor market continues in a slow-hire, slow-fire phase, leaving the Fed focused on managing underlying price stability.