MNI INTERVIEW: Tariffs Pushing Services Into Contraction - ISM

Trade policy will drag U.S. services into contraction for the next couple months as demand remains weak and inflation builds, Institute of Supply Management survey chief Steve Miller told MNI on Tuesday, adding he expects the Federal Reserve to remain in a wait-and-see stance. 

"I don't see anything here that says we should expect the numbers to go up over the next couple of months," he said about the services PMI. "I wouldn't be surprised if we're under 50 next month." 

The ISM services PMI fell 0.7 pp to 50.1 in July, below expectations for a rebound to 51.5. Respondents expressed concern over tariffs and noted that the import duties are flowing into prices, Miller said. 

The average PMI over the last 12 months sits at 52.3. "I'd expect the average to come down for at least the next two months," Miller said. "If there's a [September] rate cut, maybe the October number will get up again to where it was last year."

The ISM chief is expecting the Fed to remain in a wait-and-see stance, because of building price pressures, but a single 25 basis point rate cut by the end of the year looks likely, he said. (See: MNI INTERVIEW: Fed September Cut Not Assured - Rosengren) 

DECLINING EMPLOYMENT 

The July reading marks the 12th time in the last 13 months in which the index surpassed the 50 breakeven point that separates expansion from contraction. The prices index increased 2.4 pps to 69.9, the highest since October 2022. "It's certainly coming through in commentary that the tariffs are actually impacting prices paid now." (See: MNI INTERVIEW: Inflation Could Stifle 2025 Fed Cuts-George) 

The survey's measure of services employment fell to 46.4, the lowest level since March, from 47.2 in June. The reading followed the release last week of the Labor Department's surprisingly soft U.S. employment report.

Miller was surprised by the drop in exports and the acceleration in the decline in employment. "I had been second-guessing a little bit when the BLS numbers were strong. Seeing how low this was, before the BLS revised numbers came out, it was a bit of a shocker. It makes a five month run of really weak employment numbers from the index standpoint," he said.

"It's not dramatic reduction in the numbers, but we'll continue to watch that and see if layoffs and reduction in force commentary comes through next month," he added. 

WEAK DEMAND

New orders came in weak at 50.3, and have been flat for five months with an average of 50.1 "That's not a good sign with backlog orders contracting."

"We have too much inventory. The number is high," Miller said. "The business activity number 52.6 is a low number. The new orders also at 50.3 is a low number. Those don't show us that we're going to see high business activity going forward."