In July, the US ISM Non-Manufacturing PMI was 50.1, lower than the estimated 51.5. The Services PMI decreased from 50.8 in June to 50.1, showing a drop of 0.7. Business Activity fell by 1.6 from June to 52.6. New Orders decreased by 1.0, reaching 50.3, and Employment slipped by 0.8 to 46.4. On a positive note, Supplier Deliveries went up by 0.7 to 51.0.

Prices and Backlog Increase

Prices rose by 2.4, bringing the total to 69.9. The Backlog of Orders increased by 1.9 to 44.3. New Export Orders dropped by 3.2, and Imports experienced a sharper decline of 5.8. Seven out of ten components showed decreases, with Imports and Exports entering contraction. Increased costs from tariffs were noted. Different sectors reported how tariffs affected their planning and expenses. For instance, Accommodation mentioned delays in financial planning, while Agriculture dealt with higher import costs. Construction had to reassess feasibility, leading to some project delays. Educational Services saw lower demand in the summer. Finance remained steady, while Healthcare faced cost challenges affecting project planning. Mining expected reduced activity, and Real Estate thought tariff discussions were exaggerated. Retail reported solid but inconsistent results, and Transportation noted rising prices.

Report Highlights Economic Concerns

The July services data indicates the economy is slowing faster than expected, with a headline figure of 50.1, just above contraction. This signals that economic weaknesses are spreading beyond manufacturing, largely due to ongoing trade disputes. The most concerning aspects of the report are the shrinking employment number at 46.4 and the rise in prices paid to 69.9. This mixture of slowing growth and rising inflation creates a challenging stagflationary situation, putting the Federal Reserve in a tough position ahead of its September meeting. This report aligns with other recent weak data points, such as last week’s Q2 GDP advance estimate, which showed only 1.1% growth. Despite this slowdown, the last CPI report for July showed core inflation remains above 4%. The market now sees less than a 25% chance of a rate hike in September, a significant drop from the previous week. We recall the 2018-2019 period when similar tariff issues led to a global manufacturing slowdown and increased business uncertainty. The Federal Reserve eventually changed its approach to rate hikes and began cutting rates as growth concerns grew. We will be watching Fed officials closely for any hints of a similar shift. The conflicting data may lead to increased market volatility. The VIX index, which measures expected volatility, has been low at around 15, but this report could push it up to the 20-25 range. We think buying VIX calls or futures is a smart way to prepare for the uncertainty this report brings. For stocks, the decline in new orders and employment threatens corporate earnings, particularly for the second half of 2025. We recommend buying protective puts on broad market indices like the S&P 500 (SPY) as a sensible hedge. Cyclical sectors like transportation and industrials are particularly at risk of a downturn. The bond market is likely to react strongly as traders consider recession risks versus inflation. Given the significant drop in the employment component, recession fears seem to be rising. This should lead to higher bond prices, prompting us to consider long positions in Treasury note futures. Create your live VT Markets account and start trading now.

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