Services sector expands faster than forecast: ISM survey

The U.S. services sector expanded faster than forecast in August, reinforcing expectations that the broader economy will grow slightly more than 2% this year. The Institute for Supply Management reported Thursday that its Services PMI rose to 55.4%, a 1.3 percentage point increase from July. Federal Reserve Governor Christopher Waller, speaking moments before the release of the August survey results, said strength in services—the primary driver behind U.S. economic growth—supports forecasts for solid GDP expansion and described both the economy and labor market as being in "good shape." The reading matters because services activity is a key signal for business spending and overall demand, and it arrives just ahead of a Federal Reserve policy meeting on September 15-16.

The expansion was broad but not uniform. Twelve out of 19 services industries reported growth, according to Steve Miller, chair of the ISM's services business survey committee. The survey also showed that an ISM index of prices rose to 72.6% in August from 70.3% in July, exceeding 70% for the fifth time in six months. The 12-month average of that price index climbed to 68.5%, the highest level since April 2023. Miller said tariffs and the Middle East conflict returned as the most cited issues impacting respondents' supply chains, while positive summer seasonality was also a common theme. A supply manager in the accommodation and food services industry told ISM that general business conditions are positive, but that challenges lie in managing through the dynamic nature of administration policies, tariffs, and Middle East conflict, which have caused numerous input cost headwinds.

The evidence comes from a single secondary source, CFO Dive, which reported on both the ISM survey and Waller's speech. The article places the services expansion within the Federal Reserve's inflation-fighting context. Waller noted that three-month inflation excluding volatile food and energy costs was 3.05% through July, compared with a three-month average of 4.76% in February, calling the reduction "a considerable improvement." However, he also identified rising energy prices, the prospect of more tariff increases, and strong demand for technology needed to build out artificial intelligence as threats that could fuel inflation. Waller said wage growth, once accounting for productivity growth, is broadly consistent with an expectation that inflation is continuing to come down to 2%. The source also references Fed Chair Kevin Warsh and notes that central bank officials have identified price pressures as their primary concern ahead of the mid-September policy meeting.

The market implications are directly tied to the Federal Reserve's rate path. Waller said that if government data before the policy meeting shows inflation is accelerating, he would consider raising the federal funds rate from its current level between 3.5% and 3.75%. Conversely, if there is continued progress toward the 2% goal, he is willing to support holding the policy rate at its current level. Following Waller's comments, traders in interest rate futures trimmed the odds that policymakers will push up the benchmark rate at their mid-month meeting to 50.4% from 63.2% on Wednesday, according to CME Group's FedWatch tool. That shift suggests the market interpreted the services strength and inflation commentary as reducing, but not eliminating, the probability of a near-term rate increase.

The analysis is limited by the thin evidence base. The dossier contains one source read in full, and the material claims are not corroborated by additional reporting. The ISM survey reflects purchasing and supply executives' sentiment, which can diverge from hard economic data. The price index readings above 70% are notable, but the dossier does not provide historical context for how those levels have correlated with future inflation or policy actions. Additionally, the article does not include the full ISM report details, such as employment, new orders, or business activity sub-indices, which would offer a more complete picture of services sector momentum. What to watch next is whether incoming government data before the September 15-16 meeting shows inflation accelerating or continuing to moderate, and whether the services price pressures cited by respondents translate into sustained consumer price increases.