Services sector remains in low-growth mode in July, reports ISM

Growth remained intact in the services sector for the second consecutive month in July, expanding for the 12^th time in the last 13 months, according to the new edition of the Services ISM Report on Business, which was released this week by the Institute for Supply Management (ISM).

The July Services PMI, at 50.1 (a reading of 50 or higher signals growth), fell 0.7% off of June’s 50.8 reading, growing, at a slower rate, for the second consecutive month. Which was up increased 0.9% over May’s 49.9 reading. Prior to May, the Services PMI had seen growth in 56 of the previous 59 months, going back to the initial recovery from the pandemic in June 2020. July’s reading is 2.2% below the 12-month average of 52.3, with October’s 55.8 and May’s 49.9 marking the respective high and low readings over that period.

ISM reported that 11 of the services sectors it tracks saw growth in July, including: Transportation & Warehousing; Wholesale Trade; Finance & Insurance; Retail Trade; Other Services; Management of Companies & Support Services; Public Administration; Real Estate, Rental & Leasing; Information; Utilities; and Health Care & Social Assistance. Sectors seeing contraction included: Accommodation & Food Services; Construction; Mining; Educational Services; Agriculture, Forestry, Fishing & Hunting; Arts, Entertainment & Recreation; and Professional, Scientific & Technical Services.

The report’s subindexes that factor into the NMI were mixed from June to July, including:

• Business Activity/Production: at 52.6, down 1.6% from June, growing, at a slower rate, for the second consecutive month (it has not contracted since May 2020), with nine sectors seeing an increase in business activity;
• New Orders, at 50.3, down 1.0%, growing, at a slower rate, for the second consecutive month (and in 29 of the last 31 months) with seven sectors reporting growth;
• Employment, at 46.4, fell 0.8%, contracting, at a faster rate, for the second consecutive month, with seven sectors reporting employment gains; and
• Supplier Deliveries, at 51.0 (a reading above 50 indicates slower deliveries), up 0.7% from June, moving faster, after slowing for eight consecutive months, with nine sectors reporting slower deliveries

Comments from ISM member panelists included in the report highlighted various trends in the services sector, with tariffs again receiving a fair amount of attention (these comments were collected prior to the White House’s announcement regarding the implementation of reciprocal tariffs on August 1).

“Tariffs are causing additional costs as we continue to purchase equipment and supplies,” said a Health Care & Social Assistance panelist. “Though we need to continue with these purchases, the cost is significant enough that we are postponing other projects to accommodate these cost changes.”

A Transportation & Warehousing respondent said that business activity is flat, with his company not trending up or down. And he added that tariffs are now starting to show up in pricing, with increases across the board.

Steve Miller, Chair of the ISM Services Business Survey Committee, stated in an interview that while growth remained intact in July there is cause for concern on a few different fronts. To that end, he pointed out that for the three-month period, through July, this period represents the lowest tally since the onset of the pandemic in early 2020.

“I think that it is general slowness, whether that's because people don't want to make a bet until all the tariff activity is worked out, while consumer spending was up last quarter,” he said. “So, whether that was people trying to buy specific items ahead of tariffs coming through, for automobiles and things like that, I don't have insight into that. But what I do know is, when you look at all of the industries that are in expansion territory, and you look at all the industries that are in contraction territory together, their overall PMI average in each group is lower. It seems like a general slowdown.”

In looking at the services sector on a year-to-date basis, through July, Miller observed that the current path of flat services sector growth, especially over the last three months, is consistent with what was forecasted in the ISM’s Semiannual Report, which was issued in May.

As for the balance of 2025, he said it could be more of the same, but that comes with the caveat that there are many factors to take into account, including potential future federal interest rate cuts and the actual impact of tariffs on business operations over time.

Prices rose 2.4% in July, coming in at 69.9, while increasing, at a faster rate, for the 98^th consecutive month, the ISM report noted. And inventories inched up 0.9%, to 51.8, growing, at a slower rate, for the second consecutive month.

“Inventories are where we expected they would be,” said Miller. “They saw a jump in April, when tariff discussions got started, followed by contraction the following month, and then in the low 50s the following two months, which seems like normal behavior. Exports [down 3.2% to 47.9] saw a significant drop, in going from expansion into contraction. Services drive exports from a GDP standpoint, making it a concerning number.”