ISM report shows services also stalling out in July, with prices rising

We knew that June didn't end well for the overall economy, and early reports for July don't look good either, as we found out on Tuesday.

U.S. services sector activity unexpectedly flatlined in July with little change in orders and a further weakening in employment even as input costs climbed by the most in nearly three years, underscoring the ongoing drag of uncertainty over the Trump administration's tariff policy on businesses.

The Institute for Supply Management (ISM) said on Tuesday its nonmanufacturing purchasing managers index (PMI) slipped to 50.1 last month from 50.8 in June. Economists polled by Reuters had forecast the services PMI would rise to 51.5. A PMI reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of the economy.

Economists say businesses continue to struggle to digest the aggressive tariffs President Donald Trump is imposing on goods imported from abroad. Last week Trump, ahead of a self-imposed deadline of August 1, issued a barrage of notices informing scores of trading partners of higher import taxes set to be imposed on their exports to the U.S.

That comes one week after ISM’s manufacturing index for July had a fifth straight month of contraction, and it's an indication the economy kept deteriorating at the start of the 3rd Quarter of 2025.

If you go into the ISM Services report, it doesn’t get better.

Employment activity in the services sector dropped further into contraction territory in July after one month of expansion in May. The Employment Index registered 46.4 percent, down 0.8 percentage point from the June figure of 47.2 percent. Comments from respondents include: “Lost a few service technicians; still difficult to recruit in this market” and “We have lost employees due to normal attrition and are having issues backfilling these positions with qualified candidates.”

And even in the services sector, which is less likely to have tariffs on their products, a significant number of business owners were reporting higher prices last month.

Prices paid by services organizations for materials and services increased in July for the 98th consecutive month. The Prices Index registered 69.9 percent, 2.4 percentage points higher than the 67.5 percent recorded in June. The July reading is the index’s highest since October 2022 (70.7 percent), as well as its eighth straight month above 60 percent but the 33rd in a row below 70 percent.

Remember that we were seeing the highest inflation in 40 years in 2022, so are those types of numbers what we’re heading toward? I can't think it'll get to that 9% level, but it sure seems like it'll be above the 2.5%-3% range that we've been in.

Among other numbers in that ISM report, exports and imports in the service sector both declined in July after a one-month increase in June, and let’s see if that will bear out in the trade numbers for July that will be released at the end of this month.

And yet the stock market is staying near its record highs. I just don't get it. Are we now in a "bad news is good news" scenario where these coked-up traders think bad economic data won't just lead to a September rate cut, but a significant one? And even if that was to happen, how would a job-losing recession to go along with higher prices for tariffs not override the cheaper borrowing costs?

The last piece that is keeping us out of recession is low unemployment claims. We find out tomorrow if that changed in the last week of July, but even if those claims stay low, what's going to pull us out of the stall that the economy clearly was in by the end of July?