U.S. Services Accelerate Without a Hiring Boom. An Uncomfortable Combination for the Fed

Initial jobless claims reached 206,000 in the week ending August 29. The market had expected roughly 205,000, while the previous reading was revised from 203,000 to 204,000. The four-week moving average increased from a revised 205,750 to 207,250 claims. The deviation from expectations is small enough that, on its own, it does not materially alter the broader picture of the labor market. The U.S. Department of Labor also reported 1.779 million continuing claims, up 8,000 from the previous week, while their four-week moving average declined to 1.78175 million. The insured unemployment rate remained unchanged at 1.2%.

Non-seasonally adjusted figures remain more favorable than a year ago. Initial claims totaled 170,626 compared with 196,712 in the same week last year, representing a year-on-year decline of approximately 13.3%. Unadjusted continuing claims stood at 1.738 million versus roughly 1.892 million a year earlier, or around 8.2% lower.

This pattern is consistent with what is often described as a “slow hire, slow fire” environment. U.S. companies show little appetite for expanding headcount, but at the same time they are not yet facing pressure that would force them into widespread layoffs. Following the release, Reuters described the labor market as still stable, with low layoffs and subdued hiring.

The claims data therefore did not provide the Fed with a strong argument that elevated interest rates are already causing a sharp deterioration in employment.

Services Accelerated Much More Than Expected

A stronger signal came from the ISM Services PMI. The headline index rose from 54.1 to 55.4 in August, compared with a consensus estimate of roughly 54.2. The services sector therefore remained in expansion for the 26th consecutive month, while the August reading was also 1.7 points above the 12-month average of 53.7.

A PMI reading of 55.4 does not mean that services output increased by 5.4%. It is a diffusion index based on survey responses from companies. A reading above 50 indicates that more respondents are reporting expansion than contraction. The further the index rises above 50, the broader the expansionary signal.

The August report also showed improvement beyond the headline PMI. Business Activity rose from 59.1 to 61.7, its highest level since November 2022. New Orders jumped from 57.2 to 60.9, the highest since February 2023. Backlog of Orders increased from 50.9 to 55.6, New Export Orders rose from 52.0 to 56.3, and Imports increased from 51.8 to 56.3.

Current activity, new demand and several forward-looking indicators all strengthened.

Orders Are Rising, Employment Is Not

The most pronounced divergence in the report emerged between New Orders at 60.9 and Employment at 47.8. The gap between the two indices reached 13.1 points.

At the aggregate level, this means that new orders are growing at a very strong pace while employment in the services sector remains in contraction. The Employment Index edged up from 47.4 to 47.8, but remained below the 50 threshold for a second consecutive month and has been in contraction in 13 of the past 18 months. In August, only 11.8% of respondents reported an increase in employment, 71.1% reported no change and 17.1% reduced headcount.

ISM adds an important detail. Survey Chair Steve Miller said that, amid rising input costs, companies are also trying to control expenses through employment decisions and are frequently delaying the replacement of vacant positions despite stronger business activity.

The report itself, however, does not allow for a definitive conclusion as to how much of this divergence is attributable to higher productivity, automation, more efficient use of existing capacity or simply more cautious hiring policies. What can safely be inferred from the data is that stronger demand is not yet translating into a comparable increase in employment.

Input Price Pressures Remain Elevated

The picture of weak hiring is complicated by price developments. Prices Paid rose from 70.3 to 72.6, its highest level since 2022. The index has exceeded 70 in five of the past six months and has remained above 60 for 21 consecutive months. According to ISM, input prices in services have now been rising for 111 consecutive months.

A reading of 72.6 also does not mean that prices rose by 72.6%. It reflects an exceptionally broad increase in input costs among respondents. In August, 44.8% of companies reported higher prices, 52.9% reported stable prices and only 2.3% reported declines. None of the industries tracked reported an overall decrease in input prices.

Companies may therefore be delaying hiring not only because of uncertainty, but also in an effort to control costs in an environment of more expensive inputs. Items identified by ISM as becoming more expensive included fuel, software, computer products and steel. Items reported as being in short supply included GPUs, memory components, labor and steel.

The Fed is therefore facing a combination in which demand in the services sector remains strong while input price pressures have yet to show a meaningful easing.

Backlogs and Inventories Broaden the Picture of a Stronger Report

Inventories rose from 51.4 to 56.7, the largest monthly move among the main subindices. Backlog of Orders increased by as much as 4.7 points to 55.6. At the same time, New Export Orders reached 56.3 and Imports also stood at 56.3.

The rise in inventories can be interpreted in several ways. Companies may be responding to stronger demand, preparing for additional orders or building inventories in response to uncertainty surrounding supply chains and prices. Inventory Sentiment also rose to 54.1, meaning that a larger share of respondents considered inventories to be too high relative to their needs.

Supplier Deliveries declined from 52.8 to 51.3. This index is interpreted in reverse: a reading above 50 indicates slower deliveries. Delivery times therefore continued to lengthen, but less sharply than in July. ISM cited tariffs and geopolitical tensions in the Middle East among the factors causing disruption.

Growth Was Relatively Broad, but Not Universal

Of the 18 industries surveyed, 12 sectors reported overall growth. These included mining, real estate and rental, accommodation and food services, wholesale trade, retail trade, information services, professional and technical services, and transportation and warehousing.

Contraction was reported in agriculture, forestry and fishing, construction, management of companies and support services, finance and insurance, and health care and social assistance.

The expansion was therefore relatively broad-based, although not without areas of weakness.

For the Fed, the Problem Is the Combination of Strong Demand and Price Pressures

Claims at 206,000 point to low layoffs. The Employment Index at 47.8 indicates weak employment dynamics in services. The Services PMI at 55.4 and New Orders at 60.9 signal strong demand. Prices Paid at 72.6, meanwhile, point to elevated input cost pressures.

The August ISM report therefore shows that activity in the services sector can accelerate even while employment growth remains weak. At the same time, this is not an environment in which price pressures are easing materially.

If services activity were accelerating, employment remained weak and Prices Paid were falling sharply at the same time, the Fed would be receiving a more favorable signal that growth could continue without renewed inflationary pressures. The August report, however, showed strong orders alongside a further acceleration in input prices.

Such an environment weakens the case for an early easing of monetary policy while also keeping the risk of further tightening on the table.

Immediately after the stronger data, expectations for a September rate hike increased. Later, however, more dovish comments from Fed Governor Christopher Waller pushed the market-implied probability of a September hike down to around 50%, from approximately 63% the previous day. The market therefore remains highly sensitive to every new data release and statement from Fed officials.

Key Takeaways From the Reports

The most notable feature of the September 3 data is the divergence between order growth and employment dynamics in the U.S. services sector.

New Orders reached 60.9, Business Activity stood at 61.7, while Employment was only 47.8. The 13.1-point gap shows that strong demand growth is not yet being accompanied by a comparable expansion in employment. The ISM report itself, however, cannot determine whether this reflects productivity gains, automation or more cautious staffing policies.

At the same time, Prices Paid at 72.6 shows that input price pressures remain very strong. The Fed therefore faces not only the risk of a softer labor market. Equally important is the fact that services activity may continue to grow at a relatively strong pace without a meaningful reduction in price pressures.

The August ISM report therefore does not yet depict an economy that is clearly calling for monetary policy easing. On the contrary, the combination of strong demand, low layoffs and elevated input prices gives the Fed reason to remain cautious.