US services activity flatlined in July, ISM data shows

U.S. services sector activity unexpectedly flatlined in July, with the ISM nonmanufacturing PMI dropping to 50.1, significantly missing forecasts, as new orders (50.3) and employment (46.4) weakened. This stagnation is largely attributed to business uncertainty from the Trump administration's tariff policy, which has pushed the average U.S. tariff rate to 18.3%, the highest since 1934. Concurrently, input costs surged, with the prices paid index rising to 69.9, the highest since October 2022, intensifying concerns about potential stagflation amidst a softening labor market.

Analysis

The U.S. services sector, which accounts for over two-thirds of the economy, experienced an unexpected stall in July, with the ISM nonmanufacturing PMI slipping to 50.1, significantly missing the consensus forecast of 51.5. This near-stagnation is attributed to business uncertainty surrounding aggressive tariff policies, which have reportedly pushed the average U.S. tariff rate to 18.3%, its highest level since 1934. The report's underlying components signal further weakness, as the new orders sub-index declined to 50.3 and the employment measure contracted for the fourth time in five months, falling to 46.4. This deterioration in the labor market outlook is consistent with the recent soft U.S. employment report and its historic downward revision. Compounding these growth concerns is a sharp increase in inflationary pressure; the prices paid index surged to 69.9, the highest since October 2022. This combination of decelerating activity and accelerating input costs raises material concerns about the potential for a stagflationary environment.

Key Decisions for Investors

• Given the dual risks of stagnating growth and rising input costs, investors should consider adopting a more defensive posture, reducing exposure to cyclical sectors dependent on robust economic activity.
• The surge in the prices paid index alongside tariff-driven cost pressures suggests investors should scrutinize companies with high import dependency and limited pricing power, as their margins are likely to face significant compression.
• Monitor upcoming inflation reports and labor market data closely, as continued evidence of stagflation could complicate monetary policy and increase market volatility.
• Investors should remain alert to developments in U.S. trade policy, as the report directly links tariff uncertainty to the economic slowdown, making it a primary source of headline risk for the market.