U.S. Services Sector Hits 1.5-Year High in September as Employment Weakens

The U.S. services sector expanded at its fastest pace in 18 months in September, driven by strong new orders, according to the Institute for Supply Management. However, the robust growth came as employment in the sector declined, reflecting ongoing labor market challenges.

U.S. Services Sector Reaches 18-Month High in September, Driven by Strong New Orders and Steady Economic Momentum

More evidence that the economy remained on a solid footing in the third quarter was provided by the fact that U.S. services sector activity jumped to a 1-1/2-year high in September, accompanied by robust growth in new orders.

The Institute for Supply Management (ISM) announced on October 3 that its nonmanufacturing purchasing managers (PMI) index increased to 54.9 last month, the highest level since February 2023, from 51.5 in August.

A PMI reading exceeding 50 indicates growth in the services sector, which comprises over two-thirds of the economy. The ISM generally considers PMI readings above 49 over time to suggest an expansion of the overall economy. Economists surveyed by Reuters anticipated that the PMI of services would increase to 51.7.

In conjunction with relatively optimistic August data on consumer spending and a smaller commodities trade deficit, the survey implies that the economy has maintained a significant portion of its momentum from the second quarter.

The Atlanta Federal Reserve projects that the gross domestic product increased at an annualized rate of 2.5% during the July-September quarter and expanded at a rate of 3.0% in the second quarter. The government's annual benchmark revisions published last week indicated that the economy has performed better than previously estimated over the past three years.

The new orders measure in the ISM survey increased from 53.0 in August to 59.4, the highest level since February 2023.

Businesses were confronted with increased input prices as business demand increased. This will likely not impact the sluggish inflation trajectory as goods prices continue to decline. In August, inflation experienced its lowest annual increase in three and a half years.

Service Sector Input Costs Hit Eight-Month High as Employment Declines Amid Labor Market Strain

The ISM's prices paid measure for services inputs reached an eight-month high of 59.4 from 57.3 in August. Consistent with a labor market decline, its measure of services employment decreased from 50.2 in August to 48.1.

While most of the moderation in job growth can be attributed to the cooling demand resulting from the substantial interest rate increases in 2022 and 2023, there are still pockets of worker shortages, particularly in the leisure and hospitality sector. In August, job openings increased by 80,000 while hiring decreased.

September is anticipated to see consistent job growth. According to a Reuters survey, nonfarm payrolls were expected to increase by 140,000 jobs last month, following a 142,000 increase in August. Over the previous year, there was an average of 202,000 job gains per month.

The unemployment rate is expected to remain at 4.2%, up from 3.4% in April 2023.

Last month, the Federal Reserve reduced its benchmark interest rate by a massive 50 basis points to the 4.75%-5.00% range. This was the first reduction in borrowing costs since 2020, and it was done in response to the increasing risks to the labor market.

The U.S. Central Bank anticipates reducing rates once more in November and December.