The U.S. services economy entered the final quarter of 2026 with growth still firmly intact, but the balance between demand and operating costs is becoming more difficult for businesses to manage.

The Institute for Supply Management’s non-manufacturing purchasing managers’ index declined to 54.9 in September from 55.4 in August. Although the reading marked a modest slowdown, it remained comfortably above the 50-point threshold separating expansion from contraction and was consistent with solid economic activity during the third quarter. Services represent more than two-thirds of U.S. economic activity, making the sector an important gauge of the broader business cycle.

The more consequential development was on the cost side. The ISM measure tracking prices paid by services companies for materials and services rose to 74.0 from 72.6, reaching its highest level since July 2022. The increase suggests that companies are facing a more challenging environment in which strong demand is colliding with constrained supplies and higher transportation and energy expenses.

That pressure is particularly important for companies whose business models depend on stable logistics and predictable input costs. Fuel emerged as the most frequently cited supply-chain concern in the survey, while shortages or higher prices for steel, copper, petroleum-based products and memory components added to the burden. Supplier deliveries also deteriorated, with the related ISM index rising to 53.2, indicating slower deliveries for the 22nd consecutive month.

For corporate management teams, the environment creates a more complicated strategic equation. Demand remains strong enough to support expansion, but companies must increasingly decide how much of the higher cost base can be absorbed, passed on to customers or offset through efficiency measures. That calculation is particularly significant for retailers, transportation companies, utilities, hospitality businesses and other service providers operating with tight margins.

Demand itself has not disappeared. The services new-orders index eased to 59.8 in September from 60.9 in August, but the August reading had been the strongest since February 2023. More importantly, order backlogs increased for an eighth consecutive month and reached their highest level since July 2022. This combination points to a market where businesses continue to receive substantial demand while facing greater difficulty in converting that demand into completed output.

The composition of demand also highlights the changing structure of the U.S. economy. Consumer spending remains an important growth engine, while corporate investment in artificial intelligence and related infrastructure is providing another source of activity. Thirteen services industries reported growth in September, including wholesale and retail trade, utilities, information, transportation and warehousing, finance and insurance, and accommodation and food services. Mining and construction were among the industries reporting contraction.

Artificial intelligence is therefore playing a dual role in the business environment. Investment in AI infrastructure is supporting demand across parts of the services economy, while some companies are simultaneously using AI-enabled efficiencies as part of workforce restructuring. The services employment index returned to growth at 50.1 in September from 47.8 in August, although survey responses also pointed to companies adjusting staffing levels as efficiency gains change how certain functions are performed.

The inflation implications are more complicated. Higher input prices do not automatically translate into equivalent increases in consumer prices, because companies can absorb part of the increase or improve productivity. However, sustained cost pressure becomes more significant when it coincides with strong orders and growing backlogs. In that environment, businesses may have greater pricing power, increasing the risk that temporary cost shocks become embedded more broadly in the economy.

Energy markets add another layer of uncertainty. Higher fuel costs and disruptions affecting commodities moving through the Strait of Hormuz have increased the cost of transportation and materials, with farmers, truckers and other fuel-intensive businesses particularly exposed. The result is a broader challenge than a single-sector cost increase because transportation expenses can feed into the pricing structure of multiple industries.

The Federal Reserve faces a difficult policy backdrop as a result. The central bank raised its benchmark overnight interest rate by 25 basis points in September to a range of 3.75% to 4.00%, its first increase in three years. At the same time, softer inflation readings in July and August and weak September payroll growth have reduced expectations for another increase at the October 27-28 meeting. Financial markets were pricing in roughly a 26% probability of an October hike, down from about 71% a week earlier.

For businesses, the central issue heading into the final months of the year is therefore not whether demand has collapsed. It has not. Instead, the challenge is whether companies can maintain growth while protecting margins as energy, materials, logistics and financing costs remain elevated.

The September data point to an economy that is still expanding, but with a less favorable cost structure. Companies with resilient demand, diversified suppliers, pricing flexibility and strong productivity investments may be better positioned to navigate the environment. Those relying on uninterrupted global logistics or narrow operating margins could face greater pressure.

Looking ahead, the trajectory of services inflation, supplier delivery times, order backlogs and employment will be critical indicators. If supply constraints ease while demand remains solid, businesses could regain some cost flexibility. If energy and commodity pressures persist, however, the services sector may enter 2027 with inflation risks still competing with growth as one of the defining issues for corporate strategy and monetary policy.