Why the US Services Sector Slowed Sharply in July: Tariffs & Jobs Data
US services sector slowdown
America’s powerhouse services sector – the engine driving most of the economy – sputtered badly in July. Reports show growth came to a near standstill, squeezed by rising import costs and a softening job market.
The key barometer, the Institute for Supply Management’s (ISM) services index, slumped to 50.1 last month. That’s barely clinging to growth territory (any number above 50 means expansion) and fell short of all economist predictions. It signals a dramatic loss of momentum.
What’s driving this US services sector slowdown?
Tariff Troubles: Businesses are feeling the pinch from increased tariffs. The index tracking the prices companies pay for materials and services surged to its highest level since late 2022. “Tariffs are directly pushing up costs, which is a real worry for future inflation,” explained Steve Miller, head of the ISM Services Business Survey Committee.
President Trump’s recent executive order hiking tariffs on numerous trading partners, with rates now often between 10% and 40%, adds significant pressure. Experts at Yale’s Budget Lab estimate the average US tariff rate has rocketed to 18.3%, a level unseen since 1934.
Job Market Jitters: Hiring in the services sector is clearly retreating. The ISM’s employment gauge plunged to 46.4, indicating contraction for the fourth time in five months and hitting one of its lowest points since the pandemic.
This echoes last week’s disappointing national jobs report showing only 73,000 new non-farm jobs in July – far below expectations – pushing the unemployment rate up slightly to 4.2%. Miller warned, “Our declining hiring numbers suggest weak BLS reports will likely continue through the summer.”
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The Bigger Picture:
This data paints a worrying picture. The US services sector slowdown reflects businesses grappling with cautious consumers spooked by higher prices and policy uncertainty, alongside the direct hit from tariffs. While business activity technically grew, new orders are barely expanding.
Economists see a ripple effect. “Slowing job and wage growth almost guarantees weaker consumer spending,” noted Dean Baker of the Center for Economic and Policy Research. “Investment isn’t filling that gap, and with state/local governments tightening belts too, we’re likely looking at more economic weakness ahead.”
Why This Matters:
The services sector employs most Americans. Its health is vital. This sudden stall, fueled by tariffs and a weakening job market, raises significant concerns about the near-term strength of the overall US economy.
