US Services Sector Slows as Price Pressures and Supply Chain Strains Build

The US services sector showed signs of cooling in September, according to the latest Institute for Supply Management (ISM) survey. The nonmanufacturing Purchasing Managers’ Index (PMI) fell to 54.9 from 55.4 in August, though it remained above the 50 mark indicating growth. The survey highlighted strong domestic demand driving economic activity, particularly in consumer spending and business investment in AI and related infrastructure.

Price pressures continued to build, with the measure of prices paid by businesses for inputs reaching its highest level in over four years. Fuel costs, exacerbated by the US-Israeli conflict with Iran, dominated complaints from survey respondents. The conflict has raised energy prices and led to shortages of commodities shipped through the Strait of Hormuz, pushing diesel prices to record highs. Economists warned that these higher costs could soon spread to other sectors, broadening inflation pressures.

Despite the rising price pressures, the likelihood of a Federal Reserve interest rate hike at its upcoming meeting has decreased. Cooler-than-expected inflation readings for July and August, along with a slowdown in nonfarm payroll growth in September, have reduced the chance of a rate increase at the October 27-28 meeting. However, some analysts argued that the building price pressures underscore the need for further policy tightening.

The ISM survey also revealed that supply chains were struggling to cope with demand. The measure of supplier deliveries increased to 53.2 from 51.3 in August, indicating slower deliveries. Shortages of products like steel, fuel, and memory components were reported, with some businesses noting significant increases in shipping and material costs. The survey’s measure of new orders eased to 59.8, while order backlogs rose to their highest level since July 2022.