U.S. economy keeps up the momentum, but rising costs put a lid on new hiring

By Jeffry Bartash

ISM business survey shows a robust economy for the sixth month in a row

The U.S. economy is growing despite plenty of turbulence, but companies aren't hiring many workers.

The largest part of the economy grew in July at a robust pace, but scattered shortages of key supplies and dogged inflation raised the cost of doing business. Companies responded by keeping a lid on hiring.

Service companies such as banks, retailers and restaurants expanded last month at an accelerated rate for the sixth month in a row. An index produced by the Institute for Supply Management inched up to 54.1% from 54.0% in the prior month.

Any number above 50% means business is growing.

The ISM survey is one of the earliest indicators each month of the health of the economy. What it shows is the economy sustaining its momentum at the start of the third quarter following an above-average rate of growth in the spring.

The robust reading of the ISM poll, however, fails to tell the whole story. Prices kept rising and many companies reduced employment to offset higher costs.

There's "mounting cost pressures from all fronts," a senior construction industry executive told ISM.

Key details: New orders - a sign of future sales - rose in July and pointed to higher sales in the months ahead. Some 13 of the 18 service industries tracked by ISM reported growth.

"Business is more robust than expected, considering some of the economic headwinds still plaguing the industry," a wholesale executive said.

A gauge of prices that companies pay for supplies, however, stayed above the critical 70% threshold for the fifth time in the past six months.

When inflation is low, the index readings tend to range in the 50s and low 60s in percentage terms.

Given all the economic uncertainty, businesses scaled back hiring in July. A measure of employment slid below 50% and back into negative territory for the fourth time in the past five months.

Aside from healthcare providers, most service industries aren't adding many new jobs.

Big picture: The huge services side of the economy is the best barometer of growth. The economy is expanding at an above-average speed amid the ongoing conflict with Iran, powered by the boom in artificial intelligence and strong spending by higher-income Americans.

Businesses face an array of challengers, however, so the economy isn't firing on all cylinders. The momentum in the second quarter might be hard to sustain unless the war ends, oil prices fall and inflation subsides.

Looking ahead: "Overall, the U.S. services economy continues to be resilient," said Steven Miller, chair of the survey, but "concerns still exist" on inflation.

Market reaction: The Dow Jones Industrial Average DJIA and S&P 500 SPX rose in Wednesday trading and touched new record highs.

-Jeffry Bartash

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08-05-26 1101ET