Stagflation Strengthens While Business Activity Contracts For the First Time Since 2020

ISM also reported that “Employment activity in the services sector contracted in September for the fourth month in a row,” and it currently sits at 47.2 percent (anything under 50 percent in these surveys indicates contraction, at and above it indicates expansion). We are not at stagflation yet, as the economy is still growing, but this is the direction it is trending, especially as the labor market becomes a bigger problem in a world where there are now more unemployed people than jobs available. Much of the stagflationary concern has been focused on manufacturers and metrics like the Producer Price Index (PPI), which also revealed recently that Trump’s tariffs are having inflationary impacts as every person who ever stumbled into an econ 101 class would expect. While July’s PPI revealed that manufacturers were starting to eat the costs of Trump’s tariffs, September’s ISM report reveals how the services industry is now getting hit by them too. The comments in the survey reveal very clearly why this stagflationary dynamic of falling growth and rising prices is hitting the services sector.

“We are beginning to see the impact of the tariffs impact our business, particularly for food products from India, China, and Southeast Asia, coffee from South America, and apparel and electronics from Asia. Our year-over-year cost increases are getting progressively greater,” said an accommodation and food services company to ISM. A utilities company lamented that “We’ve had more tariff charges last month than in previous months,” while a wholesale trade company reported that “Business conditions continue to soften, even in markets that have historically been more resilient. Demand is simply weak.”

This wholesale trade company’s assertion that demand is weak is backed up by the ISM Services Business Activity Index, which fell into contraction territory for the first time since the economy was in near-freefall five years ago.

“.. first time since May 2020.” 🇺🇸

> @weisenthal.bsky.social #ISM

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— Carl Quintanilla (@carlquintanilla.bsky.social) October 3, 2025 at 8:19 AM

This contraction is driven by five industries reporting a decrease in business activity: “Mining; Real Estate, Rental & Leasing; Agriculture, Forestry, Fishing & Hunting; Construction; and Utilities.” When Jerome Powell said they were cutting rates in September because they are a little worried about the labor market due to “immigration,” it was a tacit acknowledgement that Trump’s racist mass deportation push is harming the economy, and you’re seeing echoes of what Powell said in the agriculture and construction industry’s struggles. Trump admitted he knew this would happen earlier this year. These five industries contracting in September align directly with the logical negative consequences of Trump’s policies, save for mining whose revenues have decreased each of the last three years.

Trump has jacked up energy prices with his myriad incoherent policies and his destruction of American clean energy, putting immense pressure on utilities companies. ADP, much less of a gold standard reporting agency than ISM, but still notable nonetheless, reported the first decline in construction payrolls since 2021, an industry very dependent on the immigrant labor Trump is terrorizing and deporting. While he inherited the worst housing market in 30 years, Trump’s trade policy messing with interest rates has deteriorated it further. There are recent regional turnarounds as house prices are finally falling in some areas like Texas and Florida, so there may be some relief for that industry around the corner…unless the inflationary dynamics revealed in last month’s PPI Report and this month’s ISM Services Report take firmer root in the economy. That would lead to a rise in interest rates, bringing us back to the central problem that both housing prices and the rent are too damn high.

I’m out of my depth analyzing the forestry and fishing and hunting industries, but I’d bet my bottom dollar the September contraction in that group of industries was driven primarily by struggling farmers. Soybean farmers specifically, who Trump betrayed for Argentina, and now is reportedly readying a $10 billion bailout for an industry who went from selling $12 billion in soybeans to China last year to literally fucking zero right now. All because of Trump’s trade war. Treasury Secretary Scott Bessent tried to blame Joe Biden for a Trump policy that already precipitated a soybean farmer bailout in 2018, and the Trump guy on CNBC was so insulted by this argument he called it “malarkey.” No serious person will ever take these people seriously again.

This is bad. And getting worse. The reason why stagflation is such a dangerous dynamic is because it makes effective monetary policy near-impossible. Interest rate policy basically has three states: expansion, neutral, and contraction. If growth is stalling, then inflation, another word for growth, should fall with it too. When inflation rises like it did in 2021, the Fed raises interest rates to try to make borrowing more expensive and contract growth and thus inflation. If growth is falling, inflation should be too, and so you cut interest rates to make borrowing cheaper and try to incentivize investment and spending to grow the economy. If your president’s brain is melting as he unleashes stagflationary dynamics across the economy and you need more information before moving forward, you adopt a neutral policy stance as Jerome Powell has for most of this year until last month’s rate cut in the face of a weakening labor market.

But when stagflation is on the menu, you can’t raise or cut interest rates without harming the other part of the stagflationary equation. Cutting rates to try to juice growth can make inflation worse, but raising them to tame inflation can further depress economic growth. Trump’s fight with the Fed is about his complete misunderstanding of the stagflationary forces he has already released into the economy, and his desire to repeat all the worst mistakes of the 1970s. We are not at 1970s-style stagflation yet, but today’s ISM report demonstrates how we are the closest we have been to it yet. Just like the July PPI report demonstrated we were the closest to it yet at that point too. Given Trump’s delusions and the constant upward march of business prices in the ISM Services PMI Report this entire year, there’s no reason to think next month’s will tell a different narrative than the stagflationary one this one did.