The US services sector recorded its strongest expansion in six months during August, fueled by robust demand and a rebound in business activity.

Data released on Thursday showed the Institute for Supply Management (ISM) services PMI climbed 1.3 points to 55.4, the highest reading since February and above the 54.3 figure anticipated by economists. A reading above 50 indicates industry expansion.

New orders accelerated at their fastest pace since early 2023, while the business activity index delivered its strongest performance since 2022. Backlogs of uncompleted work have now grown for seven consecutive months.

Twelve service industries reported growth in August, including mining, real estate, and accommodation and food services, while five sectors posted contraction.

The services sector's momentum is underpinned by resilient consumer spending, a stable jobs market, and healthy business investment. However, firms continue to grapple with supply chain disruptions, tariffs, and economy-wide cost increases.

The ISM prices paid index surged to 72.6 in August, marking its highest level since mid-2022.

Although inflation remains well below the peaks seen in 2022, both consumer and producer price indices have climbed and stayed elevated since the Iran conflict erupted in February, squeezing many businesses.

Steve Miller, chair of the ISM Services Business Survey Committee, noted in a statement that oil-related products, diesel, and gasoline were again reported as more expensive in August, while graphics processing units and steel were flagged as items in short supply.

Elevated costs may be prompting some firms to trim headcount, with the ISM employment index showing contraction in five of the past six months.

Supplier deliveries remained in expansion territory but fell to their lowest level in nearly a year, a potential sign that supply chain bottlenecks are gradually easing.

Industry feedback highlights a mixed but generally cautious outlook. Accommodation and food services described improving business conditions while navigating headwinds from government policy shifts, including tariff and Middle East conflict-related input cost pressures. Construction reported mortgage rates near 6.67% cooling buyer demand, with rate buydowns becoming standard practice rather than promotional tools. Educational services cited higher fuel costs from the Iran conflict, though local economic strength is expected to keep enrollment stable. Healthcare and social assistance noted fewer material backorders and some tariff rebate notifications. Professional, scientific, and technical services are facing elevated landed costs from Section 301 tariffs compounded by new forced-labor tariffs, forcing continuous recalculations of total cost of ownership, dual sourcing efforts, and nearshoring evaluations, while maintaining higher inventory buffers and accepting partial margin compression. Retailers reported worsening memory chip shortages, with low stock and high prices for equipment requiring memory cards.