When New Orders Rose Through August, America’s Service Economy Found Fresh Energy Beneath the Surface

The service economy often moves without the visible machinery of factories, yet its rhythm can be felt almost everywhere: in offices, restaurants, technology firms, financial companies and countless businesses serving consumers each day. In August, that rhythm became noticeably stronger across the United States.

U.S. services activity increased in August as strong demand pushed new orders to their highest level in about three and a half years. The Institute for Supply Management's nonmanufacturing PMI rose to 55.4 from 54.1 in July, indicating a solid expansion.

The improvement suggests that businesses serving the American economy entered the final stretch of summer with considerable demand. New orders rose to 60.9, the strongest reading since February 2023, giving the sector one of its clearest signals of momentum in recent months.

Part of that demand has been connected to continued spending on artificial intelligence and technology-related activity. As companies invest in digital systems and new capabilities, businesses across the service economy are experiencing demand that reaches beyond traditional consumer spending.

Yet beneath that stronger surface, another current is moving. Prices paid by service businesses climbed to 72.6, reflecting persistent pressure on input costs. Inflation therefore remains part of the picture even as activity continues to expand.

Supply chains have also remained under pressure. Supplier deliveries were slow for the 21st consecutive month, with businesses continuing to face disruptions linked to tariffs and broader international tensions. The result is an economy where demand is moving quickly while some of the systems supporting that demand remain less flexible.

Employment presents another contrast. Despite stronger orders and overall service-sector growth, the employment index remained below the expansion threshold at 47.8. Businesses appeared more willing to accommodate demand than to significantly accelerate hiring.

That combination creates an unusual balance. Economic activity can remain strong even while employment growth is cautious, particularly when companies rely on technology and productivity improvements to meet demand. It also means that the headline growth figures do not tell the entire story of how businesses are managing their operations.

For the Federal Reserve, the services data provide another piece of the broader economic puzzle. Strong demand can support growth, but elevated prices can make the inflation outlook more complicated. Markets have therefore been watching both sides of the report as expectations for September interest-rate policy evolve.

As August gives way to September, the American service economy appears to be carrying meaningful momentum into the next season. At the same time, higher input prices and cautious hiring leave the path ahead less certain, keeping businesses and policymakers attentive to what the coming months reveal.

AI Image Disclaimer: Illustrations were created using AI tools and are not real photographs of U.S. service-sector activity.

Sources: Reuters