America's services sector keeps chugging along, which is good news for an economy that depends on it for about 70% of all activity. Two major surveys released this week show the sector expanded again in November, marking another quarter of surprising resilience. But look a little closer and the picture gets messier.

Growth Is Real, But So Are the Complications

The ISM Services PMI rose to 52.6 in November from 52.4 in October, beating the expected 52.1 and hitting its highest level in nine months. This marks the ninth expansion reading of 2025. Business activity strengthened to 54.5, new orders held steady in expansion territory at 52.9, and supplier deliveries slowed notably, pointing to rising demand combined with ongoing supply chain friction.

Steve Miller, who chairs the ISM Services Business Survey Committee, sounded optimistic about the trajectory. "The continued expansion in both the Business Activity and New Orders indexes in November, and the highest Backlog of Orders index reading since February 2025 are positive signs of an emerging recovery for the services sector," he said.

But he also flagged some speed bumps. "Tariffs and the government shutdown continue to impact both demand and costs," Miller noted, pointing to slower deliveries caused by air traffic disruptions and customs delays tied to tariffs.

Meanwhile, S&P Global's reading told a similar but slightly softer story. Their Services PMI slipped to 54.1 from 54.8 in October, missing the flash estimate of 55.0. Still in expansion mode, sure, but at a five-month low.

The Inflation Problem Nobody Wants

Here's where things get uncomfortable for the Federal Reserve. Prices are still climbing, and not slowly. The ISM Prices Index came in at 65.4%, down slightly but still the lowest since April 2025 and firmly in expansion territory. Translation: significant price increases are happening across the services sector.

S&P Global's data showed input cost inflation actually accelerated to a six-month high, fueled by rising labor costs and those pesky tariffs everyone keeps talking about. And companies aren't eating these costs—they're passing them straight through to customers.

Chris Williamson, chief business economist at S&P Global Market Intelligence, estimates the combined PMI readings suggest roughly 2.5% annualized GDP growth for the fourth quarter. That's decent! But he warned that accelerating service-sector prices "could deter further rate cuts," even though business sentiment has improved since October.

Companies Won't Hire Despite Growing Demand

Here's one of the stranger dynamics playing out: the ISM employment index ticked up to 48.9, its highest reading since May. But that's still the sixth consecutive month of contraction. Demand is improving, order backlogs are building, but companies remain cautious about bringing on new workers.

This hesitation showed up loud and clear in Wednesday's ADP National Employment Report, which revealed private employers cut 32,000 jobs in November. That's a sharp reversal from the 42,000 jobs added in October and way below expectations for modest growth.

What This Means for the Fed

The Federal Reserve is staring at a complicated puzzle. On one hand, activity is firming up, demand looks healthier, and backlogs are rising. On the other hand, hiring remains weak, supply chains are still sluggish, and tariffs keep pushing prices higher.

When you layer in that disappointing ADP jobs report, the picture tilts toward continued support for growth. Markets are currently pricing in a 90% probability that the Fed cuts rates in December, with more easing expected throughout 2026.

The services sector matters enormously to the broader economy, and right now it's holding up reasonably well. But the combination of cooling labor demand, stubborn inflation, and ongoing policy uncertainty suggests the road ahead might be bumpier than anyone wants as we head into the new year.