Biggest part of the U.S. economy barely grows in July, ISM finds, due to tariff knock-on effects

The ISM services index for July indicated a significant slowdown in the U.S. services sector, with growth barely registering at 50.1%, down from 50.8% in June and nearing contraction. This deceleration is largely attributed to ongoing trade wars, which have driven the prices-paid index to a nearly three-year high of 69.9% due to tariff-induced costs, while the employment index fell to a four-month low of 46.4%. The report highlights how tariff uncertainty is causing businesses to delay or cancel projects, suggesting a broader economic impact of higher inflation and slower growth even in the typically more resilient services sector, reinforcing a dominant theme of economic uncertainty.

Analysis

The U.S. services sector, which constitutes the largest part of the economy, decelerated to near-stagnation in July, as the ISM services index fell to 50.1 from 50.8 in June. This slowdown is directly attributed to the knock-on effects of trade tariffs, which are creating a challenging operating environment characterized by conflicting pressures. On one hand, the employment index contracted to a four-month low of 46.4%, signaling weakness in hiring. On the other hand, the prices-paid index surged 2.4 points to 69.9, its highest level in nearly three years, indicating significant inflationary pressure from tariff-related costs. This stagflationary dynamic is corroborated by executive commentary citing project delays and cancellations due to trade uncertainty. The data suggests that the negative impacts of trade policy, previously concentrated in manufacturing, are now broadening, creating a pervasive theme of economic uncertainty that points toward slower growth and higher inflation for the second half of 2025.

Key Decisions for Investors

• Given the near-stalling growth and contracting employment in the services sector, investors should review exposure to cyclical industries like retail and construction, which are vulnerable to project delays and reduced business spending.
• The surge in the prices-paid index to a nearly three-year high signals significant margin pressure for corporations; it is critical to assess companies' pricing power and their ability to pass on rising input costs, especially in tariff-sensitive sectors like transportation.
• This weak economic data increases the probability of a dovish pivot from the Federal Reserve, so investors should monitor for potential interest rate cuts, which could support rate-sensitive assets, while remaining cautious as economic uncertainty remains the dominant theme.
• Closely track trade policy developments and upcoming ISM reports, as a resolution to trade disputes could provide a positive catalyst, whereas continued weakness would confirm a more significant economic downturn.