Core Summary

  • Data released by the Institute for Supply Management (ISM) on Tuesday showed that the pace of expansion in the U.S. services sector slowed to near-stagnation levels in July, with tariff impacts pushing up prices and the employment index contracting for the fourth time in five months.
  • Eleven service industries, including finance, transportation, and wholesale trade, saw growth in July, while seven industries, including food services and accommodation, construction, and mining, contracted. The ISM services index fell to 50.1 in July from 50.8 in June, with a reading below 50 indicating industry contraction.
  • "The most frequently mentioned topic among survey panel members remains tariff-related impacts, and there was a notable increase in the number of items listed with rising prices," said Steve Miller, chair of the ISM Services Business Survey Committee, in a statement. He added that continued contraction in employment and accelerating price increases "are concerning developments."

In-Depth Analysis

Data released by the U.S. Commerce Department on July 30 showed that consumer spending on services and goods has slowed significantly this year compared with last year, growing only 1.4% in the second quarter, half the pace of the same period in 2024. "The clear deterioration in the labor market and the drag of tariffs on real incomes suggest that a significant recovery in services spending is unlikely," noted Oliver Allen, senior U.S. economist at Pantheon Macroeconomics. "Even so, we think stagnation is more likely than collapse in the coming months," he added in a note to clients on Tuesday.

Data released by the U.S. Bureau of Labor Statistics (BLS) last Friday showed that the job market continued to cool over the past three months, with companies slowing hiring amid uncertainty over the outlook for trade policy and other Trump administration policies. Nonfarm payrolls increased by 73,000 in July, below market expectations, while job growth figures for May and June were revised down by a combined 258,000. The unemployment rate rose 0.1 percentage point to 4.2%.

After the weaker-than-expected jobs data, U.S. President Donald Trump fired the BLS director, accusing the agency of "manipulating" the data. The Conference Board said on Monday that job seekers are facing greater difficulty finding work, and more workers are being forced into part-time rather than full-time positions. The organization's employment trends index fell to 107.55 in July from 108.19 in June, the lowest level since October of last year.

In addition to the cooling labor market, inflation remaining above the Federal Reserve's 2% long-term target is also restraining consumer spending. Economists in both the public and private sectors expect price pressures to rise further as tariff impacts materialize in the coming months. The Yale Budget Lab said last Friday that consumers currently face an average tariff rate of 18.3%, the highest since 1934. The institution also estimated that the import tariffs imposed by Trump this year could push up prices by 1.8% in the short term, costing the average household $2,400 in income.

"Consumers are becoming more cautious. We are seeing a continued deceleration in consumption trends, not by a lot, but the U.S. market is indeed slowing," said Andre Schulten, chief financial officer of Procter & Gamble, on a July 29 earnings call. The ISM survey also showed rising price pressures facing services firms, with its prices paid index rising to 69.9 in July from 67.5 in June, the highest level since October 2022.