US Services Sector Slows in September Amid Rising Price Pressures

The US services sector saw a slowdown in September as strong domestic demand continued to strain supply chains and drive up input prices. The Institute for Supply Management's nonmanufacturing Purchasing Managers' Index (PMI) dropped to 54.9 from 55.4 in August, indicating growth but at a slower pace than expected. Economists had predicted a slightly higher reading of 55.2. Despite the slowdown, the PMI still suggests robust economic growth in the third quarter, fueled by consumer spending and business investments in AI and related infrastructure.

New orders for services businesses eased to 59.8 in September after hitting a 19-month high in August. 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 reached record highs, raising concerns about broader economic impacts beyond transportation and agriculture.

The survey's measure of supplier deliveries increased to 53.2, signaling slower deliveries for 22 consecutive months. This has contributed to rising input prices, with the prices paid by businesses for inputs jumping to 74.0 from 72.6 in August. The combined data from the services and manufacturing sectors point to persistent inflation, supporting expectations of a Federal Reserve interest rate hike in December.

The Fed raised its benchmark rate to 3.75%-4.00% in September, the first hike in three years, and hinted at further increases. Despite a slowdown in nonfarm payroll growth in September, the ISM survey showed a rise in services sector employment, suggesting stability in the labor market.