By: Matt Simpson, Market Analyst
The latest ISM manufacturing and services PMIs reinforce the view that the US economy remains resilient. Manufacturing activity accelerated to a four-year high, while services demand stayed robust despite weaker employment and elevated prices. Together, the reports support a patient Federal Reserve as markets turn their attention to Friday's nonfarm payrolls report.
The ISM reports point to firmer US economic growth, although both the manufacturing and services sectors have their weak spots. Prices paid remains high across both sectors and employment contracted for services, but there are enough strong features overall to suggest the US economy is not ready to roll over.
The manufacturing sector expanded at its fastest pace in more than four years, with the headline PMI rising 2.3 points to 55.6—its strongest monthly increase since January. New orders remained robust at 56.7, employment rose to a four-year high of 52.8, and the Prices Paid Index eased to 71.1. While that remains elevated, it is at least moving in the right direction.
The ISM services sector expanded a touch faster at 54, up 0.1 points from June. Business activity, new orders and new export orders show demand is clearly present in an expansive environment, though the weak spot for the overall figure came from weak employment and high prices.
The overarching message from the July ISM Services report is one of steady expansion underpinned by resilient demand, although inflationary pressures remain elevated and employment has weakened. It was not a blowout report, but neither did it signal a meaningful slowdown.
Source: ISM, LSEG, StoneX
Business activity rose 3.7 points to a five-month high of 59.1, marking its strongest monthly increase since October. 13 of the 18 industries (72%) reported an expansion of business activity, with retail trade reporting the highest. The broad-based expansion points to resilient demand despite concerns at the time over Middle East tensions, which had fuelled fears of higher energy prices, persistent inflation and interest rates remaining higher for longer.
The Business Activity Index is arguably the most important sub-index within the ISM Services report, as it measures whether service firms are experiencing an increase or decrease in overall activity. It is also the services-sector equivalent of the manufacturing output index, reflecting the difficulty of measuring output in service-based industries.
New orders also increased by 2.1 points to 57.2 to show fresh business coming through in an already expansive environment.
Source: ISM, LSEG, StoneX
Employment was the main disappointment in an otherwise solid report. The sub-index fell 3.8 points month-on-month into contraction territory at 47.4, down from a modest expansionary reading of 51.2 the previous month. In March, the index fell by an even steeper 6.6 points, leaving it down a net 2.8 points so far this year. Overall, contractions have outweighed expansions in employment throughout 2026. That may not bode well for the service-producing component of Friday's nonfarm payrolls report.
Source: ISM, LSEG, StoneX
Overall, the ISM reports reinforce the view that the US economy remains resilient. Strong demand across both manufacturing and services suggests growth has yet to buckle under restrictive policy, although elevated prices and softer services employment should keep the Fed cautious. On balance, the data supports the Fed remaining on hold while it continues to assess incoming data. The next test for markets will be Friday's nonfarm payrolls report, which could determine whether Fed funds futures continue to price a greater than 50% probability of a September rate hike.
Source: CME, Fed
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