The Institute for Supply Management reported on September 3 that its Services PMI registered 55.4 percent in August, up 1.3 percentage points from July's 54.1 reading and well above the consensus forecast of 54.3. The result marks the 26th consecutive month of expansion in the U.S. services sector and the strongest reading in six months, according to the ISM report.
Demand Surges, Activity Accelerates
The components painted a picture of broadening momentum. Business Activity rose to 61.7 from 59.1, and New Orders climbed to 60.9 from 57.2, both indicating accelerating demand across the services economy. Inventories expanded to 56.7 from 51.4, while Backlog of Orders jumped to 55.6 from 50.9. Respondents cited low staffing levels at their companies as a factor behind rising backlogs.
The data arrives at a critical juncture for monetary policy. With inflation re-accelerating in the services price channel, the Federal Reserve faces a dilemma: the sector is growing faster than expected, but the cost pressures embedded in that growth complicate the case for rate cuts.
Prices Paid Surge to Highest Level Since August 2022
The Prices Paid Index registered 72.6 percent, an increase of 2.3 percentage points from July's 70.3 and the highest reading since August 2022, when it also stood at 72.6. It was the fifth time in six months that the index exceeded the 70 percent threshold. Petroleum-related products, diesel, and gasoline were again reported as up in price for the seventh consecutive month.
Steve Miller, Chair of the ISM Services Business Survey Committee, noted that only one commodity was reported as down in price in August, compared with six in July. GPUs and steel were added as commodities in short supply. The Supplier Deliveries Index at 51.3 indicated slower performance for a fourth straight month, though it was 2.4 percentage points below its 12-month average of 53.7.
Employment Remains the Weak Link
Despite the strong activity readings, the Employment Index stayed in contraction territory at 47.8, up marginally from 47.4 in July and marking the second straight month below 50. This divergence between strong demand and weak hiring suggests firms are struggling to find qualified workers or are choosing to manage rising costs through other means rather than expanding payrolls.
"Tariffs and the Middle East conflict returned as the most cited issues impacting respondents' supply chains," Miller stated in the report. The survey was conducted amid ongoing trade tensions and elevated energy prices linked to geopolitical instability.
What It Means for Markets and Policy
The August ISM report complicates the inflation picture heading into the Federal Reserve's September meeting. On one hand, the services sector is expanding at its fastest pace in half a year. On the other, prices paid are at four-year highs and employment remains in contraction. Markets will watch closely whether the next CPI and PCE releases confirm or temper the inflationary signal embedded in this survey data.
For investors, the read-through is mixed: services companies may benefit from strong demand, but input cost pressures squeeze margins unless they can pass increases through to consumers. The employment weakness also raises questions about whether the labor market's softness is structural or cyclical.
Sources
- Institute for Supply Management, Services PMI Report, September 3, 2026: https://www.prnewswire.com/news-releases/services-pmi-at-55-4-august-2026-ism-services-pmi-report-302868046.html
- Trading Economics, United States ISM Services PMI: https://tradingeconomics.com/united-states/non-manufacturing-pmi
