U.S. Services Sector Slows Amid Inflation Pressures and Supply Chain Strains

The U.S. services sector saw a slowdown in September, with supply chain strains and rising input costs signaling persistent inflationary pressures. The Institute for Supply Management's nonmanufacturing Purchasing Managers' Index (PMI) dropped to 54.9 from 55.4 in August, though it remained above the 50 mark indicating growth. Economists had anticipated a slight decline to 55.2. Despite the slowdown, the PMI suggested robust economic growth in the third quarter, driven by strong domestic demand, particularly consumer spending and business investments in AI and related infrastructure.

New orders for services businesses eased to 59.8 in September from a peak of 60.9 in August, the highest since February 2023. Supply chains are struggling to meet demand, exacerbated by the US-Israel war with Iran, which has disrupted energy prices and commodity shipments through the Strait of Hormuz. Diesel prices have hit record highs, raising concerns about broader economic impacts beyond transportation and agriculture.

The survey's measure of supplier deliveries rose to 53.2 from 51.3, indicating slower deliveries for 22 consecutive months, which has contributed to higher input prices. The prices paid by businesses for inputs surged to 74.0 from 72.6, mirroring similar trends in the manufacturing sector. These findings suggest that inflation may remain elevated, supporting expectations of a Federal Reserve interest rate hike in December.

The Fed raised its benchmark rate to the 3.75%-4.00% range in its last meeting, the first hike in three years, with further increases anticipated. The chances of a rate hike this month were reduced by cooler inflation readings and a slowdown in nonfarm payroll growth in September. However, the ISM survey showed a rise in services sector employment, reinforcing the view of a stable labor market despite recent payroll gains.