U.S. services sector activity decelerated in July, with growing concern about employment and growing inflationary pressures.

The ISM Services PMI dipped to 50.1 in July, compared to the 50.8 recorded in June, and below the 51.5 expected in the Econoday survey of forecasters.

July's PMI level continues to reflect slow growth, and survey respondents indicated that seasonal and weather factors had negative impacts on business, the report said. The Employment Index's continued contraction and faster expansion of the Prices Index are worrisome developments.

The Business Activity Index showed expansion for July, but at a slower pace compared to June. New orders also expanded at a slower rate, while employment shrank for the fourth time in the last five months.

Prices jumped compared to June and remain elevated (the July price reading is the highest since October 2022).

Services is expected to show very slow expansion continued in July with the index firmer at 51.5 versus 50.8 in June.

Producing a monthly composite on general activity tracked in volumes, the Institute for Supply Management surveys several hundred service-providing firms from 16 industries (construction and mining are included). The services composite index has four equally weighted components: business activity (closely related to a production index), new orders, employment, and supplier deliveries (also known as vendor performance). The first three components are seasonally adjusted but the supplier deliveries index does not have statistically significant seasonality and is not adjusted. For the composite index, a reading above 50 percent indicates that the services economy is generally expanding; below 50 percent indicates that it is generally declining. The supplier deliveries component index requires extra explanation: a reading above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM services index, investors will know what the economic backdrop is for the various markets. The services index is a composite of four equally weighted components: business activity, new orders, employment, and supplier deliveries. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly -- and causing potential inflationary pressures. While the ISM manufacturing index has a long history that dates to the 1940s, this report goes back to 1997. Note that in 2020 the ISM changed the name of the report to services from non-manufacturing though it continues to track two key goods producing industries: construction and mining.