–ISM’s Miller: Employment Index in Contraction as Firms Reluctant to Hire While Trying to Cope with Impact of Rising Costs
By Max Sato
(MaceNews) – U.S. services sector activity perked up in August on summer holiday, back to school and other demand but many firms continued to struggle in supply management, hit by rising costs from the lingering Mideast conflict and additional U.S. tariffs as well as memory chip shortages caused by technology projects linked to artificial intelligence, data released Thursday showed.
The purchasing managers index for services compiled by the Institute for Supply Management, which indicates direction of activity, rose 1.3 percentage points to a six-month high of 55.4 after ticking up 0.1 point to 54.1 in July and dipping 0.5 point to 54.0 in June. It was above the consensus forecast of 54.1. Twelve industries indicated growth in August, down from 13 in July, while five reported contraction, up from four in the prior month.
The index is 1.7 points above its 12-month moving average of 53.7 in August and above the average for the 11th straight month. The 12-month moving average at 53.7 is the highest reading since 53.7 in June 2023, when the economy was near the end of its recovery from the pandemic.
“Tariffs and the Middle East conflict returned as the most cited issues impacting respondents’ supply chains,” ISM Services Business Survey Committee Chair Steve Miller said in a statement. “Positive summer seasonality was also a common theme, with accommodation and food services and arts, entertainment and recreation both among the five fastest-growing industries in August.”
Among comments in the August report, a company from the accommodation and food services category said, “General business conditions are positive. The challenges lie in managing through the dynamic nature of the administration’s policies – tariffs and Middle East conflict – that have caused numerous input cost headwinds for suppliers and us.”
“The memory shortage is continually getting worse, a firm in the retail trade sector said. “For devices requiring (memory) cards, inventory is low and prices are high.”
The business activity index rose to a nearly four-year high and the new orders index reached the highest in more than three years but they were not strong enough to entice firms to increase new hires, leaving the employment index in contraction for the second month in a row and the eighth in 12 months.
“As a potentially positive sign for employment, there was a slight reduction in the share of companies cutting staff levels, down from 19% in July to 17.1% in August,” Miller said, adding that the strong showings in business activity and new orders “could signal a shift to increased employment in the services sector.”
Miller told a briefing that higher productivity, whether due to the use of artificial intelligence or not, seems to be a factor behind the employment index being in contraction (below 50) in 13 of the last 18 months.
Comments in the August report showed that firm were slow in replacing attrition and requiring higher levels of approval before filling positions while staff reductions were seen in only isolated cases, he said.
“My main analysis based on some of the conversations that we’ve seen over the last several months is that reluctance in hiring and slow hiring … is probably related to just trying to manage the economic outcomes of increased pricing,” Miller said.
For August, the employment index in contraction is “related to the cost pressures coming from import duties and elevated oil prices leading to a standard margin-protection response of delaying backfills to attrition,” Miller told Mace News by email. But he also said none of the firms that provided comments in August linked the use of AI to reduced hiring.
Asked how services providers are coping with increasing borrowing costs as concerns about rising inflation and fiscal spending are boosting long-term bond yields globally, Miller told Mace News that there were three comments related to borrowing costs, all from the construction industry, “and specifically negative business impacts for residential construction.”
In the report, a construction company said, “The bond market pushed 30-year mortgage rates up to 6.67%, reducing affordability and moving prospective buyers back to the sidelines. The new-build housing market continues to slow with the selling season coming to a close and the start of the new school year.”
Three of the four sub-indexes that directly factor into the services PMI were in expansion territory (prior figures in parentheses).
Business activity/production 61.7 (59.1) +2.6; The index hit the highest since 62.7 in November 2022. It follows a 3.7-point rise in July when the index level was the second highest in two years. The index has seen a wide swing earlier this year. It 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 60.9 (57.2) +3.7; The index reached the highest since 61.6 in February 2023. It rose 2.1 points to 57.2 in July and fell 2.2 points in June. Earlier, the index rose 2.0 points to 60.6 in March 2026 to hit the highest since 61.6 in February 2023 before slipping 7.1 points to 53.5 in April.
Employment 47.8 (47.4) +0.4; In July the index fell 3.8 points, slipping back into contraction after rising 3.3 points to 51.2 in June. It has been below the neutral level of 50 for 13 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 51.3 (52.8) -1.5; The index indicated slower performance for the 21st month in a row (above 50 means slower deliveries) but the August reading of 51.3 is the lowest since 50.8 in October 2025.
Among other sub-indexes:
Prices 72.6 (70.3) +2.3; Above 60 for 21 months in a row. The latest level of 72.6 is the highest since 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 56.7 (51.4) +5.3; The index showed expansion (above 50) for the seventh straight month. It follows a slight 0.2-point rise to 51.4 in July and 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.