U.S. Services Sector Continues Growth Amid Economic Challenges in July 2025

Economic Activity in the U.S. Services Sector

In July 2025, the U.S. services sector experienced growth for the second consecutive month, according to the latest release from the Institute for Supply Management (ISM). The report, known as the Services ISM® Report On Business®, revealed a Services Purchasing Managers' Index (PMI®) reading of 50.1%. This marks a slight decline from June's figure of 50.8% but remains above the crucial 50% threshold that indicates economic expansion.

Key Highlights of the Report

The Services PMI® has been a critical indicator for tracking the health of the services industry, which encompasses a broad range of activities, including finance, healthcare, and logistics. Notably, the Business Activity Index scored 52.6%, down from June's 54.2%, indicating continued expansion within the sector.

The New Orders Index also remained positive, registering 50.3%, reflecting consumer demand for services. However, the Employment Index has entered contraction territory for the second straight month, now at 46.4%, raising concerns about hiring trends in the workforce. As businesses navigate a complex environment marked by rising costs and external pressures, the ability to attract and retain talent may become increasingly difficult.

Slow Growth Amid Challenges

Steve Miller, CPSM, CSCP, the Chair of the ISM Services Business Survey Committee, noted that the slight decrease in PMI reflects ongoing seasonal and weather-related impacts on business operations. While the overall services sector shows resilience, the continued contraction in employment raises red flags about job security and economic stability.

The rising Prices Index, which climbed to 69.9%, illustrates inflationary pressures affecting various sectors. Respondents indicated that increasing costs are tied, in part, to tariffs and supply chain disruptions which have exacerbated the situation. Insights from the industry suggest that managers anticipate future challenges related to pricing and expenses, especially in sectors heavily reliant on imported goods.

Sector-Specific Insights

A closer look at industry performance reveals mixed signals. Eleven service industries reported growth in July, including Transportation, Warehousing, and Wholesale Trade. On the other hand, seven industries, notably Accommodation & Food Services and Educational Services, saw contractions. Several respondents highlighted how external factors—like tariffs and trade uncertainties—are influencing operational decisions and financial planning.

The report noted significant feedback from companies regarding their ongoing struggles with supply shortages and increasing costs. For example, agricultural sectors mentioned specific challenges arising from high tariffs affecting their supply chains, ultimately raising costs for consumers.

The Outlook

Despite these challenges, the overall sentiment remains cautiously optimistic. Optimistic forecasts suggest that the economy will continue to expand, with ISM’s predictive models correlating the current PMI readings with positive GDP growth forecasts. However, consistent efforts to monitor and address labor force issues are essential to maintain this momentum.

The resilience shown in business activity and new orders indicates that while obstacles remain, the services sector is adapting and evolving in response to current economic dynamics. The July 2025 ISM Report encapsulates a phase of growth interlaced with caution, as companies brace for the implications of global trade tensions and domestic economic conditions.

Final Thoughts

In conclusion, while the Services PMI® indicates growth, the contraction in employment and rising prices suggest a cautious approach going forward. Businesses must navigate these complexities as they plan for the coming months, balancing growth initiatives against the backdrop of economic uncertainties. Awaiting further data and trends, key stakeholders in the service industry will likely need to adjust strategies to thrive amidst evolving conditions.