US service sector activity surges to 18-month high, employment declining
The Institute for Supply Management (ISM) said on Thursday that its nonmanufacturing purchasing managers (PMI) index accelerated to 54.9 last month, the highest level since February 2023, from 51.5 in August.
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Fuelled by robust growth in new orders, the US services sector experienced a significant surge in September, reaching its highest level in a year and a half. This upswing suggests the economy maintained its momentum in the third quarter, according to the Institute for Supply Management (ISM).
The non-manufacturing purchasing managers’ index (PMI) jumped to 54.9, exceeding the previous month’s 51.5, the highest level since February 2023.
A PMI reading above 50 indicates expansion in the services sector, which accounts for over two-thirds of the economy. Moreover, the ISM considers PMI readings above 49 as a sign of overall economic growth ¹. The new orders index soared to 59.4, the highest since February 2023, driven by strong demand.
However, the services employment index declined to 48.1 from 50.2 in August, signalling a slowdown in the labour market. This moderation in job growth is largely attributed to cooling demand following significant interest rate hikes in 2022 and 2023. Despite this, certain sectors such as leisure and hospitality, face worker shortages, with job openings increasing by 80,000 in August while hires decreased.
The unemployment rate is forecast to be unchanged at 4.2%. It has increased from 3.4% in April 2023. The Federal Reserve last month cut its benchmark interest rate by an unusually large 50 basis points to the 4.75%-5.00% range, the first reduction in borrowing costs since 2020, acknowledging the growing risks to the labour market.
The Atlanta Federal Reserve is estimating that gross domestic product increased at a 2.5% annualized rate in the July-September quarter. The economy grew at a 3.0% pace in the second quarter. The government’s annual benchmark revisions published last week showed a stronger economic performance in the past three years than previously reported. The ISM survey’s new orders measure surged to 59.4, also the highest level since February 2023, from 53.0 in August.
With demand rising, businesses faced higher prices for inputs. This probably does not change the slow inflation trajectory as goods prices continue declining. The annual increase in inflation was the smallest in 3-1/2 years in August. The ISM’s prices paid measure for services inputs increased to an eight-month high of 59.4 from 57.3 in August.
The U.S. central bank is expected to cut rates again in November and December.
With inputs from agencies.