Insights 
VT 
In July, the US ISM Non-Manufacturing PMI was 50.1, compared to an estimate of 51.5. The Services PMI decreased from 50.8 in June to 50.1, indicating a decline of 0.7.
Business Activity dropped by 1.6 from June, reaching 52.6. New Orders fell by 1.0 to 50.3, while Employment decreased by 0.8 to 46.4. However, Supplier Deliveries increased by 0.7 to 51.0.
Prices And Backlog Increase
Prices rose by 2.4 to 69.9, and Backlog of Orders increased by 1.9 to 44.3. New Export Orders declined by 3.2, while Imports saw a sharper drop of 5.8.
Seven out of ten components showed declines, with Imports and Exports falling into contraction. Increased costs due to tariffs were reported.
Various sectors reported tariff impacts affecting planning and cost. Accommodation noted delayed fiscal planning, while Agriculture experienced higher import costs. Construction faced feasibility reevaluation, with some project delays.
Educational Services saw reduced demand during summer, whereas Finance reported steady activity. Healthcare faced cost issues, impacting project planning. Mining expected activity decreases, while Real Estate viewed tariff talk as bluster. Retail noted solid but fluctuating results, and Transportation reported price increases.
Report Highlights Economic Concerns
The July services data shows the economy is slowing down much faster than anticipated, with the headline number at 50.1, just barely avoiding contraction. We see this as a clear signal that the economic weakness is spreading beyond manufacturing. This softness is a direct result of ongoing trade disputes.
The most alarming parts of the report are the contracting employment number, now at 46.4, and the simultaneous jump in the prices paid component to 69.9. This combination of slowing growth and rising inflation creates a difficult stagflationary environment. This puts the Federal Reserve in a very tough position ahead of its September meeting.
This report confirms other weak data points we’ve seen recently, including last week’s advance estimate for Q2 GDP which showed growth at only 1.1%. Even with that slowdown, the last CPI report for July showed core inflation was still persistent at over 4%. The market is now pricing in less than a 25% chance of a September rate hike, a significant drop from last week.
We are reminded of the 2018-2019 period, when similar tariff concerns caused a global manufacturing slowdown and increased business uncertainty. The Federal Reserve was forced to pivot away from rate hikes and eventually began cutting rates as growth concerns mounted. We will be watching for any language from Fed officials that hints at a similar change in stance.
The conflicting data should lead to a significant rise in market volatility. The VIX index, which measures expected volatility, has been trading around a low 15, but this report could easily push it back towards the 20-25 range. We view buying VIX calls or VIX futures as a direct way to position for the uncertainty this report creates.
For equities, the drop in new orders and employment is a direct threat to corporate earnings, especially for the second half of 2025. We believe buying protective puts on broad market indices like the S&P 500 (SPY) is a sensible hedge. Cyclical sectors like transportation and industrials look particularly vulnerable to a pullback.
The bond market will react strongly as traders weigh recession risks against inflation. Given the sharp drop in the employment component, we feel the scales are tipping toward recession fears. This should cause bond prices to rise, so we are considering long positions in Treasury note futures.
