US services sector slows as inflation pressures build in September
The US services sector saw a slowdown in September, even as strong domestic demand strained supply chains and pushed input prices to their highest level in over four years. The Institute for Supply Management's nonmanufacturing Purchasing Managers' Index (PMI) fell to 54.9 from 55.4 in August, though a reading above 50 still indicates growth. Economists had expected a slight decline to 55.2. The conflict in the Middle East has exacerbated supply chain issues, with higher fuel prices and shortages of commodities shipped through the Strait of Hormuz. Diesel prices hit record highs, impacting farmers and truckers, while other sectors reported shortages of steel, fuel, and memory components.
Higher prices could soon spread to other sectors, broadening inflation pressures. Some analysts argue this underscores the need for the Federal Reserve to raise interest rates again this month and in December. However, cooler inflation readings in July and August, along with a sharp slowdown in nonfarm payroll growth in September, have reduced the likelihood of a rate hike at the Fed's upcoming meeting. Matthew Martin, senior US economist at Oxford Economics, noted that price pressures are building, but the economy can withstand additional policy tightening due to strong underlying growth.
The survey's measure of supplier deliveries increased to 53.2 from 51.3 in August, indicating slower deliveries for 22 consecutive months. The gauge of prices paid by businesses for materials and services jumped to 74.0, the highest level since July 2022. Copper, diesel, steel, petroleum-based products, and memory products were among the commodities whose prices increased. The ISM's gauge of new orders received by services businesses eased to 59.8 from 60.9 in August, but order backlogs rose to their highest level since July 2022.
The survey also showed growth in services sector employment after two months of contraction, climbing to 50.1 from 47.8 in August. Some companies reported filling vacated positions due to promotions or retirements, while others cited restructuring due to efficiencies gained using AI tools. Jonathan Millar, a senior economist at Barclays, regarded September's reading as consistent with moderate job gains in the fourth quarter.