Tariff Price Transmission Effects Emerge in Service Sector

Sub-indicators reveal weakening momentum in U.S. service sector expansion. The new orders index dipped to 50.3, down 1 percentage point from June and approaching the expansion-contraction threshold, while the employment index fell further to 46.4, signaling ongoing labor market contraction. Concurrently, price pressures surged markedly, with the prices paid index jumping from 67.5 to 69.9—maintaining above-60 levels for eight consecutive months and hitting a peak last seen in October 2022 (70.7%).

"Persistent employment contraction and accelerating price increases are concerning dynamics. New export orders dropped 3.2 percentage points, and import orders fell 5.8 points—both shifting from expansion to contraction—demonstrating tariffs' global trade impact," noted Miller. Survey responses identified tariffs as the most frequently cited concern, with significantly more commodities labeled as "experiencing price hikes."

Industry-specific testimonials corroborate this:

• A healthcare executive: "Tariffs raised our equipment/supply costs. While essential purchases continue, we’re deferring other projects to absorb the increases."

• Transportation/warehousing respondent: "Business activity stagnates. Tariffs now visibly inflate prices across goods categories."

• Agriculture sector: "Higher tariffs elevate costs for imported livestock/poultry feed ingredients and trace minerals, raising cost-risk concerns among businesses and clients."
  
  

Sectorally, July saw contraction signals in seven industries, most acutely in accommodation/food services. An ISM survey participant stated: "Anticipated tariff impacts delayed next fiscal year’s procurement plans."

Late July, the National Restaurant Association warned U.S. Trade Representative Greer of "grave concerns" over new tariffs. A 30% levy on Mexican/Canadian food/beverage imports would impose $15.16B in annual costs, eroding the sector’s "already razor-thin margins" and triggering menu price hikes. Tariffs targeting Brazil/EU would disrupt key supply chains (coffee, beef, European foods, wines/spirits).

Capital markets reflect tariffs’ F&B impact: Despite Yum Brands CFO Turner’s April claim of "minimal" tariff exposure, Q2 earnings missed expectations as trade tariffs dented consumer spending, driving a 5.1% stock drop on August 5.