US service businesses reported stronger activity in August, with new orders hitting a 3-1/2-year high and price pressures picking up. The data keeps inflation worries in focus ahead of the Federal Reserve's September 15-16 meeting.
The Institute for Supply Management (ISM) said its services index rose to 55.4 in August from 54.1 in July. A reading above 50 signals expansion, and the latest figure points to solid growth in the sector that accounts for the bulk of US economic output.
The new orders gauge jumped to 60.9, its strongest reading since February 2023. That suggests demand remains robust, even after a year of high interest rates. But the same report showed the prices paid index—a measure of what firms say they're paying for inputs—climbed to 72, up from 68.9 in July. That's a sign that cost pressures are building again, which could feed through to consumer prices.
Why the services sector matters
Services cover everything from restaurants and hotels to financial services, healthcare, and transportation. Because it's such a large slice of the economy, the ISM services survey is closely watched by investors as a real-time gauge of how businesses are faring. When the index rises, it often signals that consumer spending and business investment are holding up—good news for corporate profits and stock markets.
But the same strength can be a double-edged sword. If demand stays hot, companies may keep raising prices, which could keep inflation above the Fed's 2% target. That would make it harder for the central bank to cut interest rates soon, and could even prompt further hikes if price pressures intensify.
The August report echoes trends seen in other major economies. In Europe, for example, Italy's services sector hit a 3.5-year high in August, while Spain's services growth cooled but remained strong. Meanwhile, Germany's services sector stayed in contraction, and France's slipped back into contraction. The US, by contrast, is showing resilience.
What it means for investors
For everyday investors, the key takeaway is that the US economy is still growing at a decent clip, but inflation is not fully tamed. That complicates the Fed's decision at its upcoming meeting.
Most market participants expect the Fed to hold rates steady in September, but the strong services data could influence how long rates stay elevated. If the Fed keeps rates higher for longer, that tends to weigh on bond prices (pushing yields up) and can make growth stocks less attractive, since their future earnings are discounted more heavily.
On the other hand, a resilient economy is generally supportive for corporate earnings and stock prices. Sectors like consumer discretionary, technology, and industrials often benefit when services demand is strong.
Investors should also watch the prices paid index closely. If it continues to climb, it could signal that inflation is becoming stickier, which might force the Fed to act more aggressively. That would be a headwind for both stocks and bonds.
The ISM report is just one data point, but it arrives at a critical time. The Fed is balancing the need to cool inflation against the risk of slowing the economy too much. With services demand still running hot, the central bank may feel less pressure to cut rates soon.
For now, the message is clear: the US economy is not falling off a cliff, but inflation is still a concern. Investors should brace for continued volatility as markets digest the implications for interest rates.
