US Services Sector Slowdown Amid Rising Costs and Supply Delays

The U.S. services sector saw a slight slowdown in September, but companies faced surging input costs and persistent supply delays, raising concerns about inflation. The Institute for Supply Management’s (ISM) services business activity index dropped to 54.9 from 55.4 in August, remaining above the 50 threshold that indicates growth. Economists had anticipated a nearly steady reading of 55.2, but the decline still suggests strong economic growth in the third quarter, driven by consumer spending and investments in artificial intelligence.

Demand outpaced supply, with the new orders index falling to 59.8 from 60.9 in August. The U.S.-Israeli conflict with Iran worsened supply chain issues, pushing up energy prices and causing shortages in goods shipped through the Strait of Hormuz. Diesel prices hit record highs, potentially affecting transportation and agriculture. The supplier deliveries index rose to 53.2, marking 22 consecutive months of delivery slowdowns, which has driven up business costs.

The prices paid index climbed to 74 from 72.6, signaling rising inflation. Combined with similar trends in the manufacturing sector, economists expect the Federal Reserve to raise interest rates in December. The central bank recently increased its benchmark rate to a range of 3.75-4.00%, its first hike in three years, and hinted at further increases. However, expectations of another rate hike this month have eased due to lower inflation readings and weaker job growth in September.

The ISM survey showed that services employment grew, with the index rising to 50.1 from 47.8 in August. This, along with increased manufacturing employment, suggests a stable labor market despite September’s weak job growth figures. Overall, strong demand in the services sector is being offset by delivery delays and rising costs, complicating efforts to curb inflation.