US Services Sector Slows as Price Pressures Build

The US services sector saw a slowdown in September, with strong domestic demand stretching supply chains and pushing input prices to their highest level in over four years. The Institute for Supply Management's survey highlighted complaints about rising fuel prices, driven by the US-Israeli conflict with Iran, which has disrupted energy and commodity supplies. Economists warn that these higher prices could spread inflation into 2024, potentially prompting the Federal Reserve to raise interest rates again.

The ISM's nonmanufacturing Purchasing Managers' Index fell to 54.9 from 55.4 in August, though a reading above 50 still indicates growth. Economists had expected it to remain at 55.2. The survey revealed that supply chains are struggling, with tariffs and fuel costs being the most cited issues. Shortages of products like steel, fuel, and memory components were reported, while diesel prices hit record highs, affecting farmers and truckers.

The survey's measure of supplier deliveries rose to 53.2 from 51.3, indicating slower deliveries for 22 consecutive months. Order backlogs reached their highest level since July 2022, growing for the eighth straight month. The gauge of prices paid by businesses jumped to 74.0 from 72.6, the highest since July 2022, suggesting higher inflation ahead. The Federal Reserve had raised its benchmark interest rate to 3.75%-4.00% last month, with financial markets pricing in a 26% chance of another hike this month.

Despite a slowdown in nonfarm payroll growth in September, the ISM survey showed growth in services sector employment, climbing to 50.1 from 47.8. Companies reported filling vacated positions due to promotions or retirements, while others restructured due to efficiencies gained from AI tools. Economists view this as consistent with moderate job gains in the fourth quarter.