U.S. services-sector sentiment improved in August for the first time in three months. The Institute for Supply Management (ISM) reported on the 3rd that its Non-Manufacturing Business Activity Index for August came in at 55.4, up 1.3 points from July’s 54.1. The reading exceeded the market consensus of 54.1 compiled by Dow Jones. It marked the 26th straight month above the 50 threshold that separates expansion from contraction, underscoring the underlying resilience of the U.S. economy.
The biggest driver behind the index’s rise was a sharp jump in new orders. The New Orders Index surged 3.7 points from 57.2 in July to 60.9, reaching its highest level in roughly three and a half years, since February 2023. With the artificial intelligence (AI) investment boom seen as underpinning domestic demand, the data paints a picture of expanding services-sector activity supporting third-quarter economic growth.
At the same time, the Prices Index — which measures what companies pay for inputs — rose 2.3 points to 72.6 from 70.3 in July. The reading suggests inflation could remain above the Federal Reserve’s 2% target, a development likely to influence expectations around monetary policy.
Supply-chain tightness also persists. The Supplier Deliveries Index eased to 51.3 from 52.8 in July, but has now held above 50 for 21 consecutive months, meaning delivery delays continue to push input prices higher. With no signs of slowing demand, supply-side constraints are weighing on the cost structure of the services sector.
While orders are robust, employment growth remains sluggish. The Employment Index stood at 47.8, roughly flat from July and below the 50 threshold. Companies appear cautious about adding staff amid policy uncertainty, and some economists have flagged the possibility of downside risk to August nonfarm payrolls.
Key Index Movements
Note: ISM’s August Non-Manufacturing Index, released on the 3rd. Readings above 50 indicate expansion.
The latest results confirm that the services sector remains on a solid expansionary trajectory. The sharp rise in new orders, in particular, reflects the strength of domestic demand centered on AI-related investment. At the same time, the combination of a higher Prices Index and ongoing supply-chain tightness points to stubborn inflationary pressure.
The Federal Reserve finds itself in a difficult position as it seeks to balance inflation control with economic support. While services-sector activity remains resilient, the simultaneous combination of weak employment growth and rising prices is complicating the monetary policy outlook. Rate-hike expectations for the remainder of the year continue to simmer in markets, and the trajectory of policy rates could shift further depending on upcoming economic data.