US Services Sector Slows as Supply Chain Strains Boost Inflation Concerns

The US services sector saw a slowdown in September as strong domestic demand strained supply chains and pushed up input prices, suggesting inflation may persist into next year. The Institute for Supply Management reported its nonmanufacturing Purchasing Managers’ Index (PMI) dropped to 54.9 from 55.4 in August, though it remained above the 50-mark indicating growth. Economists had anticipated a slight decline to 55.2. Despite the slowdown, the PMI still signals robust economic growth in the third quarter, driven by consumer spending and business investments in AI and related infrastructure.

New orders for services businesses eased to 59.8 in September from 60.9 in August, which had been the highest since February 2023. Supply chains are struggling to meet demand, exacerbated by the US-Israel war with Iran, which has disrupted energy prices and commodity shipments through the Strait of Hormuz. Diesel prices have hit record highs, raising concerns about broader economic impacts. The measure of supplier deliveries rose to 53.2, indicating slower deliveries for 22 consecutive months, which has contributed to rising input prices.

The survey’s measure of prices paid by businesses for inputs surged to 74.0 from 72.6 in August, mirroring a similar trend in the manufacturing sector. Together, these surveys suggest inflation could remain elevated, supporting expectations of a Federal Reserve interest rate hike in December. The Fed recently raised rates to the 3.75%-4.00% range, with further increases anticipated. The survey also showed an uptick in services sector employment, reinforcing views that the labor market remains stable despite recent weak payroll gains.