GDP weakens, job losses rise, and now the services—the bedrock of the U.S. economy—flatline: Is the American economy nearing recession territory?
Services sector barely grows in July, ISM data signals warning signs
The U.S. services sector, which makes up over two-thirds of the national economy, showed almost no growth in July 2025. The ISM Non-Manufacturing Index fell to 50.1, just a notch above the 50 threshold that separates expansion from contraction. In June, the index had already dropped to 50.8, and this latest reading reinforces that the economy is stalling.
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This slowdown comes amid significant cost pressures caused by tariffs, which are now heavily impacting service-based industries just as they did manufacturing. Analysts and businesses alike are concerned that this sluggish momentum could drag down broader GDP growth for the quarter.
Employment in service industries contracts again as hiring freezes continue
One of the most troubling figures in the ISM report was the Employment Index, which sank to 46.4% in July. This is the fourth contraction in the past five months, indicating that companies are continuing to freeze hiring or reduce staff due to economic uncertainty.
Businesses in healthcare, retail, logistics, and real estate have reported scaling back on new hires. Rising costs and caution over policy changes have made employers hesitant to take on additional payroll expenses.
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Rising input costs from tariffs push prices to two-year high
The Prices Paid Index—which tracks what service providers pay for materials and services—jumped to 69.9%, marking the highest inflation reading since October 2022. This sharp rise in costs is directly tied to recent U.S. trade policies and tariffs, which have increased prices on imported goods and services used across the sector.
Construction, transportation, and healthcare businesses are among the hardest hit, with many saying these inflationary pressures are now being passed on to consumers, sparking fears of persistent inflation even as growth slows.
Labor market adds just 73,000 jobs as unemployment ticks up
July's broader U.S. job market data also painted a concerning picture. The economy added just 73,000 jobs, far below economists' expectations. To make matters worse, job numbers for May and June were revised downward by a combined 258,000 positions, further weakening the employment trend.
The unemployment rate rose to 4.2%, and labor force participation continues to decline, suggesting that workers are either leaving the job market or struggling to find new opportunities.
Recession fears rise as weak growth and high prices create stagflation risk
With inflation climbing and growth nearly flat, many experts are warning of a possible stagflation scenario—a dangerous mix of stagnant growth and persistent inflation. Leading economists, including Mark Zandi of Moody's Analytics, say the U.S. economy is facing a real risk of sliding into recession if trade and immigration policies continue to create uncertainty and disrupt the labor supply.
Although some policymakers are calling for interest rate cuts, analysts argue that monetary policy alone won't be enough to offset the drag caused by tariffs, rising costs, and hiring slowdowns.
Service sectors like healthcare, construction, and hospitality feel the biggest hit
Industries like healthcare, transportation, construction, hospitality, and real estate are seeing the sharpest impacts of these economic shifts. Service providers in these sectors report that higher material costs, import disruptions, and reduced workforce availability are slowing down projects, reducing customer capacity, and increasing delays.
In particular, small businesses that rely on stable pricing and predictable costs are struggling to adapt, with some delaying expansion or cutting back on hours and staff.
Businesses call for stability and clarity on trade policies
Across the board, U.S. service-sector businesses are calling for more stable and transparent trade policies. Uncertainty surrounding tariffs, supply chain disruptions, and shifting regulations is making it harder for companies to plan ahead, invest confidently, or grow their workforce.
As policymakers in Washington debate new trade deals and fiscal strategies, business leaders say that without policy clarity, they will remain hesitant to invest or hire at full capacity—keeping the economy in a state of limbo.
The bottom line: A fragile services sector puts U.S. economy at risk
The July 2025 ISM report is a stark reminder that while the U.S. economy hasn't officially entered a recession, it's walking a fine line. The combination of sluggish growth, rising inflation, and falling employment in the services sector is worrying economists and business leaders alike.
Unless there's a clear shift in trade policy, stronger job growth, and relief from rising prices, the second half of 2025 could bring deeper trouble for the U.S. economy.
FAQs:
Q1. Why did the U.S. services sector slow down in July 2025?
Due to tariff-related cost increases and hiring cuts across major industries.
Q2. What does the ISM Services PMI reveal about recession risk?
It shows stagnation with rising inflation, signaling possible stagflation and recession warning.
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