Activity in the U.S. services sector strengthened more than expected in August, driven by robust demand and a sharp increase in new orders, while employment remained weak and businesses faced intensifying cost pressures.
The ISM Services PMI rose to 55.4 in August from 54.1 in July, beating economists’ expectations of 54.2. A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of U.S. economic activity.
The August reading was consistent with solid economic growth during the third quarter, according to economists cited by Reuters.
New Orders Reach Highest Since 2023
Demand was one of the strongest components of the report. The New Orders Index jumped to 60.9 from 57.2, reaching its highest level since February 2023.
The acceleration points to continued strength in domestic demand, with increased spending related to artificial intelligence also contributing to business activity.
Supplier deliveries remained slow, with the index at 51.3, compared with 52.8 in July. ISM readings above 50 for supplier deliveries indicate longer delivery times.
Price Pressures Intensify
The report also showed a renewed increase in costs for services businesses.
The Prices Index climbed to 72.6 from 70.3 in July, signaling that input costs continued to rise at a rapid pace.
The combination of stronger demand and elevated input prices comes as the Federal Reserve assesses whether inflation is moving sustainably toward its 2% target.
Financial markets were pricing roughly a 64% probability of a 25-basis-point Fed rate increase at the September 15-16 meeting following the report and recent comments from Fed Chair Kevin Warsh.
Employment Remains the Weak Spot
Despite stronger overall activity, employment remained in contraction territory.
The ISM Services Employment Index stood at 47.8 in August, little changed from 47.4 in July and below the 50 threshold separating expansion from contraction.
The divergence between stronger orders and weaker employment adds another dimension to the U.S. labor-market picture ahead of Friday’s employment report. Economists surveyed by Reuters expect payrolls to rebound by about 56,000 jobs in August, following an unexpected decline of 23,000 in July.
The August ISM report therefore showed a services economy characterized by stronger demand and business activity alongside persistent price pressures and subdued hiring, keeping both inflation and labor-market conditions central to the Federal Reserve’s September policy decision.
