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US services sector growth slows moderately

by Mark Mendoza

The U.S. services sector experienced a slowdown in September, with new orders falling to a nine-month low. However, despite the decline, the pace of growth in the services industry remained consistent with expectations for solid economic growth in the third quarter. The survey conducted by the Institute for Supply Management (ISM) also indicated that inflation in the services sector remained elevated, while employment growth slowed only gradually.

The resilience of the U.S. economy, even after 18 months of interest rate increases by the Federal Reserve, suggests that monetary policy could remain tight for some time. The Fed’s ongoing messaging that rates will remain “higher for longer” may be enough to sustain the downward pressure on economic momentum caused by previous rate increases. This suggests that the Fed may continue to prioritize controlling inflation over stimulating economic growth.

The ISM’s non-manufacturing Purchasing Managers’ Index (PMI) slipped to 53.6 in September from 54.5 in August. However, a reading above 50 still indicates growth in the services industry, which accounts for more than two-thirds of the U.S. economy. The PMI was in line with economists’ expectations and remained well above the level that indicates an expansion of the overall economy.

The third quarter’s economic growth estimates were boosted by other data showing an increase in motor vehicle sales in September, following a slowdown in August. However, a strike by United Auto Workers could potentially constrain supply and slow down momentum. Despite this, growth forecasts for the third quarter are as high as a 4.9% annualized rate, compared to the 2.1% pace of growth in the previous quarter.

Thirteen industries, including retail trade, mining, utilities, construction, and public administration, reported growth in September. On the other hand, accommodation and food services, and wholesale trade were among the five industries reporting a decline.

Comments from companies surveyed in the services sector were generally positive, reflecting the ongoing shift in spending away from goods and towards services. Businesses in accommodation and food services noted that prices are coming down, but also mentioned some lingering supply constraints. Providers of professional, scientific, and technical services reported that the fourth quarter is looking better than forecast. Retailers stated that business is ramping up in preparation for the holiday season. However, businesses in management and support services reported that bank and leasing company volume seems to be falling and bankruptcy work is picking up.

The survey also highlighted a decrease in new orders received by services businesses, dropping to the lowest level since December. However, order backlogs improved, and exports increased. Despite the slowdown in new orders, services businesses continued to face higher prices, with twelve industries reporting an increase in prices paid.

The services sector employment gauge dipped slightly in September, mainly due to supply issues. Comments from businesses indicated that filling vacated job positions is challenging, and the labor market remains very competitive. However, the ADP National Employment Report showed private payrolls rising by only 89,000 jobs in September, the smallest count since January 2021. Economists caution against placing too much weight on the ADP report, as it has not been a reliable predictor of the Bureau of Labor Statistics’ more comprehensive employment report, which is scheduled to be released on Friday.

Overall, while the U.S. services sector experienced a slowdown in September, the pace of growth remains consistent with expectations for solid economic growth in the third quarter. The resilience of the economy suggests that monetary policy could remain tight for some time, and the Fed’s priority may continue to be controlling inflation. However, challenges in the labor market and supply constraints are factors that could impact future growth in the services sector.

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