WASHINGTON (Reuters) – The U.S. services sector slowed in September as new orders fell to a nine-month low, but the pace remained consistent with expectations for strong economic growth in the third quarter.
The survey conducted by the Institute for Supply Management (ISM) on Wednesday also showed that service sector inflation remained high last month and hiring only slowed gradually. The economy’s resilience, 18 months after the Fed began raising interest rates to cool demand, suggests that monetary policy could remain tight for some time.
“Assertive messaging from the Fed that interest rates will stay high for longer may be enough at this point to maintain downward pressure on the economic momentum generated by last year’s actual interest rate increases,” said Curt Rankin, chief economist at PNC Financial. In Pittsburgh.
The ISM said the non-manufacturing PMI fell to 53.6 last month from 54.5 in August. A reading above 50 indicates growth in the services sector, which represents more than two-thirds of the economy. The PMI was in line with economists’ expectations and remained well above the 49.9 level, which the ISM says over time indicates an expansion in the overall economy.
Growth estimates for the third quarter were boosted by other data showing auto sales rose in September, after hitting a speed bump in August. However, a United Auto Workers strike could restrict supply and slow momentum.
Growth expectations for the third quarter reach a 4.9% annual rate. The economy grew at a pace of 2.1% in the April-June quarter.
Thirteen industries registered growth, including retail, mining and utilities as well as construction and public administration. Among the five industries that recorded a decline were accommodation and food services and wholesale trade.
Corporate feedback was moderately positive as the sector remains supported by the shift in spending away from commodities following massive growth during the Covid-19 pandemic.
Companies in the accommodation and food services space said “prices are falling across the board for most essential goods,” but they also pointed to some ongoing supply constraints. Professional, scientific and technical services providers reported that “the fourth quarter looks better than expected.”
“Business is accelerating in preparation for the holiday season,” retailers said. But companies that provide corporate management and support services reported that “the volume of banks and leasing companies appears to be declining as credit tightens,” and added that “insolvency business is on the rise.”
The survey’s measure of new orders received by service companies fell to 51.8, the lowest level since December, from 57.5 in August. But the backlog of orders improved and exports increased.
Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury bond prices rose.
Prices are still high
Despite the slowdown in new orders, service companies continued to face higher prices. Twelve service industries reported an increase in prices paid, including utilities, retail and wholesale. The four industries that recorded a decline were transportation, warehousing, mining, agriculture, forestry, fishing and hunting, and finance and insurance.
A measure of the prices paid by service companies for inputs was unchanged at 58.9. Some economists argue that the ISM’s measure of paid service prices is a good indicator of personal consumption expenditure (PCE) inflation. The Fed tracks PCE price indexes for its 2% inflation target. The annual increase in the PCE price index excluding food and energy fell below 4% in August for the first time in more than two years.
Since March 2022, the US central bank has raised interest rates by 525 basis points to the current range of 5.25% to 5.50%. Labor demand remains strong despite rising borrowing costs. The ISM’s measure of service sector employment fell to 53.4 from 54.7 in August, mostly reflecting supply issues.
According to ISM, feedback from companies included “a decline due to filling vacancies,” “the labor market remains very competitive” as well as “we have lost employees due to natural attrition and are having issues filling these positions.”
That was in contrast to the ADP national employment report, which showed private sector payrolls rose by just 89,000 jobs in September, the smallest number since January 2021, after an increase of 180,000 in August. September’s gains, which fell short of economists’ expectations of adding 153,000 jobs, exaggerate the pace of the slowdown in the labor market.
The government said on Tuesday that there were 1.51 job openings for every unemployed person in August, and that job vacancies increased by the most in two years. A Conference Board poll conducted last week showed that consumer opinions about the labor market improved in September.
Economists also cautioned against reading too much into the ADP report, which was developed in conjunction with the Stanford Digital Economics Lab, noting that it was not a reliable measure in trying to forecast the number of private jobs in the Labor Department’s Bureau of Labor Statistics’ more comprehensive employment report. . The government is scheduled to release its September report on Friday.
“We do not assign significant weight to ADP failure because of the negative correlation of ADP with BLS private payrolls since the introduction of the new methodology and because the weakness in September was driven by large companies, while the ADP sample is skewed toward smaller companies,” the economists said at Goldman Sachs.
Large companies eliminated 83,000 jobs, while small companies added 95,000 jobs, and salaries for medium-sized companies increased by 72,000 jobs.
According to a Reuters survey of economists, the Bureau of Labor Statistics is expected to report that private payrolls increased by 160,000 jobs in September. Including government hiring, total nonfarm payrolls were expected to rise by 170,000 jobs last month after an increase of 187,000 jobs in August.
Reporting by Lucia Mutikani; Edited by Paul Simao, Andrea Ricci and Will Dunham
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