US Services Sector Slows as Inflation Pressures Build

The US services sector saw a slowdown in September, but strong domestic demand continued to strain supply chains and drive up input costs. The Institute for Supply Management's nonmanufacturing Purchasing Managers’ Index (PMI) fell to 54.9 from 55.4 in August, still indicating growth but below expectations of 55.2. Economists noted that rising fuel prices, exacerbated by the US-Israeli conflict with Iran, are pushing inflation pressures higher, with potential implications for 2027.

Fuel costs were the most cited issue impacting supply chains, mentioned twice as often as any other problem. Diesel prices hit record highs, affecting farmers and truckers, while shortages of commodities like steel, fuel, and memory components were also reported. Some businesses increased international orders to secure materials, while others faced delays due to strong demand. Despite these challenges, the mining sector benefited from high oil and gas prices, encouraging more production.

New orders in the services sector eased to 59.8 from 60.9 in August, though order backlogs rose to their highest level since July 2022. The ISM’s gauge of prices paid by businesses jumped to 74.0, the highest since July 2022, with increases in copper, diesel, steel, and petroleum-based products. These trends suggest higher inflation ahead, reinforcing the Federal Reserve’s recent rate hike and the possibility of further increases. Financial markets currently price in a 26% chance of a rate hike at the Fed’s October meeting.

Employment in the services sector rebounded, climbing to 50.1 from 47.8 in August, indicating stability in the labor market despite weaker payroll gains. Some companies filled vacated positions, while others restructured due to efficiencies from AI tools. Economists view this as consistent with moderate job gains in the fourth quarter.