–ISM’s Miller: Significant Portion of Higher 2026 Capex Plans Among Services Firms Linked to Rises in Financing Costs, Prices Paid to Suppliers
By Max Sato
(MaceNews) – U.S. services sector remains resilient despite rising costs, expanding for the 25th straight month in July, but the pace of growth was little changed from June as higher business activity and new orders were partly offset by slower hiring in the face of stiff U.S. tariffs, the lingering Mideast conflict and the use of artificial intelligence, industry data released Wednesday showed.
The purchasing managers index for services compiled by the Institute for Supply Management, which indicates direction of activity, edged up 0.1 percentage point to 54.1 after dipping 0.5 point to 54.0 in June. The index has been fluctuating month to month, falling 2.1 points to 54.0 in March after rising 2.3 points to a more than three-year high of 56.1 in February. The index is 0.7 point above its 12-month moving average of 53.4 in July and above the average for the 10th straight month.
“Tariff impacts and the Middle East conflict continued to be mentioned by respondents, but much less frequently than in prior reports,” ISM Services Business Survey Committee Chair Steve Miller said in a statement. “Overall, the U.S. services economy continues to be resilient.”
But he quickly added, “Concerns still exist regarding mortgage and inflation rates, and we are still in the midst of pricing impacts due to the recent run-up in petroleum costs.”
“Uncertainty on how the Iran conflict will impact the price of oil, as well as the knock-on effect to construction and other materials,” a public administration service provider told the ISM. A firm in the transportation and warehousing sector said, “Conditions are largely unchanged from last month. The exception is pricing, which continues to rise, driven mainly by fuel and labor costs.”
The World Cup soccer games that took place from June 11 to July 19 in the United States, Canada and Mexico supported rises in business activity and new orders in July but there was no direct link to the drop in the employment index, Miller said. In the June report, the event helped employment gains in accommodations and food services but they account for only 3% of the U.S. GDP and thus were not a driver behind the employment index increase.
The employment index, which has been fluctuating widely in recent months, slipped back into contraction in July and has now been under the neutral line of 50 for 12 months in the past 18 months. The decline is “curiously” contrast to a rebound in the business activity index to the second highest level in two years and a rise in new orders index to the fifth highest in the same period, Miller told reporters.
To put the current services employment conditions into context, he said, the last time the index was below 50 for 12 of an 18-month period was from August 2009 until January 2011, when the U.S. unemployment rate climbed close to 10% and stayed high in the aftermath of the 2008-2009 global financial crisis.
Among comments on employment from surveyed firms are: “We’re seeing a small reduction at the moment, some coinciding with AI implementation” and “Lower employment in the U.S., higher in India and other low-cost geographies.”
Asked whether these factors are preventing the employment index from recovering to growth in a sustained manner, Miller replied that the application of artificial intelligence to replace some workers is slowing new hires.
“Whether that’s a permanent thing, long-term thing or not … I think it’s too early to tell,” he said. “I think we are still in a testing phase. That is the implication that I got from respondents.”
Comparing the latest 18-month employment index behavior to the 18-month period after the financial crisis, Miller said, “It seems that something different is happening over the last 12 to 18 months. Whether it has to do with tariffs, whether it has to do with the war, or whether it has to do with AI, probably a little bit of all three.”
The prices index popped above 70 in July after easing in June. However, the number of commodities reported as down in price was six in July, up from three the previous month. Petroleum-related products and plastics were again reported as commodities up in price. In good news for utilities and construction firms, transformers are no longer reported as a commodity in short supply but were added to the list of those up in price, Miller said.
Asked whether services firms plan to increase capital investment this year, as indicated in the ISM’s semi-annual survey released in June, regardless of whether the U.S. Federal Reserve has to raise interest rates to ease inflation, he said, “Higher capital spending, a significant portion of that is going to be related to financing costs and increased prices paid (to suppliers). Maybe not all of it is related to business activity and capacity increase.”
Past interest rate cuts didn’t seem to filter through to mortgage rates or borrowing rates for an extended period of time, he added.
Three the four sub-indexes that directly factor into the services PMI were in expansion territory (prior figures in parentheses).
Business activity/production 59.1 (55.4) +3.7; The current level is the second highest in two years. The index rose 2.5 points to 59.9 in February to hit the highest since 59.9 in May 2024 before slumping 6.0 points in March to 53.9, the lowest since 49.9 in September 2025.
New orders 57.2 (55.1) +2.1; The rise in July follows a 2.2-point drop in June. Earlier, the index rose 2.0 points to 60.6 in March to hit the highest since 61.6 in February 2023 before slipping 7.1 points to 53.5 in April.
Employment 47.4 (51.2) -3.8; The index slipped back into contraction after rising 3.3 points to 51.2 in June. It has been below the neutral level of 50 for 12 out of the last 18 months. The index slumped 6.6 points to 45.2 in March, falling to the lowest since 43.7 in December 2023, only a month after it rose 1.5 points to 51.8 to reach the highest since 53.9 in February 2025.
Supplier deliveries 52.8 (54.4) -1.6; The index indicated slower performance for the 20th month in a row (above 50 means slower deliveries).
Among other sub-indexes:
Prices 70.3 (67.7) +2.6; Above 60 for 20 months in a row. The index’s 12-month average reading rose to 68.1 in July, its highest level since 69.9 recorded in April 2023. The index stood at 71.3 in May to hit the highest since 72.6 in August 2022. The index fell 3.6 points to 63.0 in February, the lowest since March 2025 (60.9)
Inventories 51.4 (51.2) +0.2; It follows a 11.3-point plunge in June to 51.2, which was a five-month low. The index slumped 9.1 points in January to 45.1, the lowest since 45.1 in December 2022. It rose 9.4 points to 62.5 in May, matching the record high of 62.5 hit in May 2010.