The largest component of the US economy showed solid growth in July, but sporadic shortages of key materials and stubborn inflation have increased business costs, prompting companies to respond by keeping hiring in check. Service-sector businesses, including banks, retailers, and restaurants, expanded for the sixth consecutive month in July, with an index compiled by the Institute for Supply Management (ISM) rising slightly to 54.1% from 54.0% the previous month. Any reading above 50% indicates business activity is growing.

The ISM survey, one of the earliest monthly indicators of economic health, revealed that the economy maintained its growth momentum into the early third quarter, following above-average expansion in the spring. However, the strong ISM survey readings do not tell the full story. Prices continue to rise, and many businesses are offsetting the impact of higher costs through layoffs. "Cost pressures are intensifying across the board," one construction executive told the ISM.

Macro Perspective: The expansive service sector serves as the best barometer for economic growth. Amid ongoing conflicts with Iran, the economy is expanding at an above-average rate, driven by the artificial intelligence boom and strong spending by high-income US households. However, businesses face a series of challenges, preventing the economy from running at full capacity. Unless the war ends, oil prices fall, and inflation subsides, the growth momentum seen in the second quarter may prove difficult to sustain.

Outlook: Survey Chair Steven Miller stated, "Overall, the US services economy remains resilient," though "concerns about inflation persist."

Market Reaction: The Dow Jones Industrial Average and the S&P 500 rose during trading on Wednesday, reaching new intraday record highs.