The August ISM reports show that the U.S. economy continues to expand, but the sources of that growth are becoming more differentiated. Manufacturing growth moderated during the month as new orders cooled, while services activity strengthened. At the same time, elevated price pressures remain a concern and employment growth continues to lag overall business activity. Taken together, the reports suggest that the economy remains resilient, but the underlying trends are becoming more complicated.
Manufacturing: Growth Moderates as New Orders Cool
The ISM Manufacturing PMI fell to 54.6 in August from 55.6 in July, but remained in expansion territory for an eighth consecutive month. A reading above 50 indicates that manufacturing activity is generally expanding, while a reading below 50 indicates contraction. Although the headline index declined, the sector continues to show solid growth, and all five of the subindexes that directly contribute to the Manufacturing PMI remained in expansion territory.
The most important development in the report was the slowdown in New Orders, which declined to 53.7 from 56.7. New Orders are particularly important because they provide an indication of future demand for manufactured goods. While the index remains above 50, meaning orders are still increasing, the three-point decline suggests that demand is becoming less robust. ISM also noted that businesses were less optimistic about demand in August, with positive comments becoming less common compared with July.
This moderation in new orders has not yet translated into a meaningful slowdown in production. The Production Index was 58.3, only slightly below July’s 58.5. This suggests manufacturers are still operating at a healthy pace despite the softer flow of new orders. Backlog of Orders, however, declined to 51.8 from 55.0, providing another indication that the pipeline of future work has become less strong.
The labor market within manufacturing also showed some moderation. The Employment Index fell to 51.2 from 52.8, remaining just above the 50 level that separates expansion from contraction. This means manufacturers continued to add workers, but hiring slowed during the month. With production still strong but employment growth weakening, manufacturers appear to be meeting current demand without significantly increasing their workforce.
Cost pressures remain another important part of the manufacturing picture. The Prices Index held at 71.1, indicating that manufacturers continued to report increases in the prices they pay for materials and other inputs. The index has now remained in increasing territory for 23 consecutive months. Respondents continued to report higher prices for materials including steel, aluminum, copper, and petroleum-related products.
Overall, the manufacturing report presents a solid but less forceful picture than July. The sector is still expanding, production remains strong, and new orders are still growing. However, the decline in New Orders and Backlog suggests that the pace of future demand is becoming an important area to monitor. If that moderation continues, it could eventually begin to affect production and hiring.
Services: Stronger Demand, Persistent Cost Pressures
The services sector provided a more positive signal in August. The ISM Services PMI increased to 55.4 from 54.1 in July, marking the 26th consecutive month of expansion. Because services make up a large portion of the U.S. economy, continued strength in this sector provides an important source of support for overall economic activity.
Demand was particularly strong. The Business Activity Index increased to 61.7, while the New Orders Index rose to 60.9. New Orders are important here for the same reason they are in manufacturing: they provide an indication of future demand. The increase to 60.9 suggests that businesses across the services sector continued to see strong demand for their services.
This is an important contrast with manufacturing. While manufacturing New Orders slowed in August, services New Orders strengthened. That divergence helps explain why the overall economy can remain resilient even as certain parts of the economy begin to lose momentum. Strong demand for services is currently providing an important counterweight to softer manufacturing activity.
The labor market remains a weaker part of the services report, however. The Employment Index remained below 50, indicating that service-sector employment was still contracting. This continues a broader pattern in which business activity has remained stronger than hiring. While strong demand is encouraging, the lack of a corresponding improvement in employment is something to monitor, particularly because services are such an important source of U.S. employment.
Price pressures also remain elevated. The Services Prices Index increased further during August, reaching 72.6, its highest level since 2022. This suggests that businesses in the services sector continue to face significant increases in the prices they pay for materials and services. Persistent cost pressures are important because service prices can be slower to adjust than goods prices, particularly when costs are tied to wages and longer-term contracts.
The services report therefore provides a generally positive picture of economic activity, but with some important caveats. Demand is strong and business activity accelerated, but employment remains soft and price pressures are elevated. The combination suggests that the services sector is supporting economic growth, while also presenting some of the same inflation and labor-market challenges seen elsewhere in the economy.
What This Means for Investors
The August ISM data continue to point to a resilient U.S. economy, but the composition of that growth has changed. Manufacturing remains in expansion, although the decline in New Orders and Backlog suggests that momentum is moderating. At the same time, stronger business activity and New Orders in services are helping offset some of that weakness and providing continued support for the broader economy.
The more challenging part of the report is the continued gap between business activity and employment, along with elevated price pressures. Companies are seeing healthy demand, but that demand has not consistently translated into stronger hiring, while businesses continue to face higher costs.
For investors, this environment reinforces the importance of pricing power, cost discipline, and durable demand. Companies that can maintain margins while managing higher costs may be better positioned than those that are more dependent on falling input prices or rapidly accelerating economic growth. The August data do not point to a broad slowdown, but they do suggest that investors should pay close attention to where growth is coming from and how individual companies are managing the pressures underneath it.
Disclosure
This material is provided by Gryphon Financial Partners, LLC (“Gryphon”) for informational purposes only. It is not intended as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Facts presented have been obtained from sources believed to be reliable, though Gryphon cannot guarantee their accuracy or completeness. Gryphon does not provide tax, accounting, or legal advice. Individuals should seek such guidance from qualified professionals based on their specific circumstances.