US Services Sector Slows as Inflation Pressures Rise

The US services sector saw a slowdown in September, with strong domestic demand straining supply chains and pushing input prices to their highest level in over four years. The Institute for Supply Management (ISM) survey highlighted complaints about rising fuel prices, exacerbated by the US-Israeli conflict with Iran, which has driven up energy and commodity costs. Diesel prices, in particular, have hit record highs, affecting farmers and truckers, while economists warn that these higher costs could soon spread to other sectors, fueling broader inflation.

The ISM’s nonmanufacturing Purchasing Managers’ Index (PMI) fell to 54.9 from 55.4 in August, still indicating growth but slightly below expectations. The survey revealed that 13 services industries reported growth, including wholesale trade and retail, while mining and construction contracted. Supply chain issues were worsened by the Middle East conflict, with fuel costs cited twice as often as any other issue impacting performance.

Price pressures intensified, with the ISM’s gauge of prices paid by businesses jumping to 74.0, the highest since July 2022. Commodities like copper, diesel, and steel saw price increases, mirroring similar trends in the manufacturing sector. Economists suggest these inflationary pressures may prompt the Federal Reserve to raise interest rates again, though cooler inflation readings and a slowdown in job growth have reduced the likelihood of an October hike. The Fed’s benchmark rate was last raised in September to a range of 3.75%-4.00%.

Despite these challenges, services sector employment saw a slight rebound, climbing to 50.1 from 47.8 in August. Some companies reported filling vacancies due to promotions or retirements, while others noted restructuring driven by AI efficiencies. Economists maintain that the labor market remains stable, despite weaker-than-expected payroll gains in September.