U.S. Services Sector Cools as Inflation Pressures Persist

The U.S. services sector showed signs of slowing in September, adding to concerns about inflation. The ISM nonmanufacturing Purchasing Managers' Index (PMI) fell to 54.9 from 55.4 in August, missing expectations of 55.2. While a reading above 50 still indicates expansion, the decline signals weaker growth in a sector that drives over two-thirds of U.S. economic activity.

Supply chain challenges intensified, with the supplier deliveries index rising to 53.2 from 51.3, marking 22 consecutive months of slower deliveries. Higher input costs, driven by energy prices and disruptions from the U.S.-Israel war with Iran, reinforced expectations of persistent inflation. The prices paid index surged to 74.0 from 72.6, echoing similar trends in manufacturing data.

Despite the slowdown, labor market conditions remained stable. Services employment improved to 50.1 from 47.8, supporting the view of a resilient job market even as September payroll growth underperformed. Economists now anticipate a potential interest rate hike by the Federal Reserve in December, though softer inflation readings in recent months reduce the likelihood of a move this month.

The data also highlighted strong domestic demand, with consumer spending and business investment in AI and related infrastructure sustaining third-quarter growth. New orders eased slightly to 59.8 from 60.9, but the figure still reflected robust activity compared to earlier in the year.