- Lead. The US services sector expanded at its fastest pace in several months in August, with the Institute for Supply Management’s non-manufacturing gauge rising to 55.4 from 54.1 in July — a result that beat analyst forecasts released on September 3.
- Fact. The reading extends what is now more than 50 consecutive months of expansion in the services economy; the only ISM sub-component that printed below the 50-point expansion threshold was Employment, while the Prices Paid component remained elevated, signalling that cost pressures in the services sector have not eased.
- Stake. Coming on top of August’s blowout payrolls report showing 162,000 jobs added, the ISM Services figure has pushed market-implied odds of a Federal Reserve rate hike at the September meeting to approximately 58 percent, according to CME Group’s FedWatch tool.
The ISM Services index covers roughly 70 percent of the US economy and is one of the data points the Federal Open Market Committee monitors most closely when assessing whether demand remains strong enough to sustain elevated price pressures. A reading of 55.4 — more than five points above the expansion-contraction divide — suggests that demand in finance, technology, healthcare and other service industries has not materially softened despite the Fed keeping its benchmark rate at 3.5 to 3.75 percent.
What the Components Show
Business Activity, the ISM sub-index most analogous to the output measure in manufacturing surveys, posted a particularly strong result in August, indicating that service firms are still processing a high volume of work. New Orders also expanded, suggesting forward momentum in demand. The Supplier Deliveries component was the only indicator to decline from July’s reading — a technical signal of easing supply-chain pressure rather than weakening demand.
The Prices Paid component, however, remained well above 50, consistent with services inflation that has proven stickier than goods inflation over the past two years. The FOMC’s June minutes, published in July, noted that core PCE inflation was running at 3.3 percent in April — materially above the committee’s 2 percent target — and that participants had removed language from their statement suggesting future rate cuts were imminent.
The Fed’s September Dilemma
The Federal Reserve’s policy meeting is scheduled for mid-September. Before this week’s data, markets had been roughly split on whether the FOMC would hike or hold, with Fed Governor Christopher Waller having flagged support for holding rates steady pending further data. The ISM Services print, combined with the payrolls beat, has tilted that calculus toward action.
The ISM report is one of the last major data releases before the Fed’s blackout period ahead of the September decision. Unless the forthcoming CPI or PPI figures surprise materially to the downside, the data flow heading into the meeting now appears weighted toward a hike. Markets are pricing accordingly, with two-year Treasury yields rising to their highest level since early 2025 in Friday’s session.
The resilience of the services sector is both the source of the US economy’s strength in 2026 and the principal obstacle to the Fed’s efforts to bring inflation sustainably back toward its target.