July's Services Sector Drives Expansion as Factory Sector Dips and Prices Climb

Services Led the Charge, Thanks to Soccer and Fireworks

In July, U.S. business activity grew at its quickest rate in eight months, driven by robust domestic services demand that counterbalanced a slowdown in factory output, escalating supply chain bottlenecks, and increasing expenses. Readings higher than 50 signify economic growth.

The Bad News: Factories Are Slowing Down and Costs Are Rising

In a press release, Chris Williamson of S&P Global Market Intelligence stated, "July saw a concerning intensification of supply chain delays and accompanying renewed upturn in price pressures, constraining growth and subduing demand."

Williamson further noted, "Events over recent days in the Middle East will have only further exacerbated these supply chain and price worries and raise downside risks to the near-term outlook for the economy, hinting that July's upturn may not be the start of an improving trend." Tensions between the United States and Iran have escalated lately, interrupting vital shipping lanes, limiting global oil availability, and intensifying price pressures.

According to the S&P report, input cost inflation hit a peak not seen since May 2025, with the primary drivers being soaring energy and transport expenses, plus tariffs and other price hikes. Businesses are transferring these higher expenses to consumers - selling prices increased at their fastest rate in almost four years.

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Additionally, supply chains are under pressure, as manufacturers note that supplier delivery times have extended more than at any point since August 2022.

Even with these difficulties, the general expansion in activity lifted business sentiment and encouraged firms to start hiring again. Services and manufacturing companies each recorded small increases in employment.

"The month saw an encouraging return to hiring by companies, with employment rising for the first time in three months," Williamson said.

The survey's data gathering took place between July 9 and July 23.

The World Cup, hosted by the United States for the first time in decades, spurred significant economic activity across hospitality, travel, and retail sectors. Combined with the Independence Day holiday, these events provided a temporary lift to services demand.

This divergence underscores the economy's dependence on one-time events and seasonal factors, raising questions about the sustainability of growth. The rise in input costs and selling prices, along with lengthening supplier delivery times, could pressure corporate margins and consumer spending in the coming months. Moreover, the escalation of U.S.-Iran tensions adds uncertainty to the outlook for energy prices and global trade routes, potentially further straining supply chains.

Yet the underlying fragility of the manufacturing sector, as evidenced by its output falling to a five-month low, suggests that the overall expansion may be uneven and vulnerable to external shocks.

The July data shows expansion, but with concerns about supply chains and costs. Williamson cautioned that the latest Middle East developments increase negative risks and suggested that July's improvement might not represent the beginning of a sustained positive trend.

These mixed signals illustrate an economy grappling with divergent trends. The services sector, buoyed by major events like the World Cup and Independence Day, continues to drive expansion. However, manufacturing struggles and persistent supply chain disruptions - exacerbated by tensions in the Middle East - threaten to undermine momentum.

Only time will tell if July's upturn is sustainable or a temporary spike.

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