U.S. Services Growth Slows as October ISM Index Falls to 54.5

U.S. services activity grew at a slower pace in October, with the Institute for Supply Management’s Services PMI declining to 54.5 from 54.9 in September. The headline measure remained above the 50 threshold that signals expansion, although new orders and business activity weakened more sharply than the overall index.

October’s 0.4-point decline marked a second consecutive monthly easing after August’s reading of 55.4. That is a loss of momentum, not evidence that the services sector has stopped growing. The October survey also showed slightly firmer employment alongside continuing pressure from input costs and slower deliveries.

Demand and supply conditions need to be read together in the ISM’s monthly PMI reports. The headline is a composite of business activity, new orders, employment and supplier deliveries. Not every increase in one of those components points to stronger demand, especially when the supply-deliveries measure is rising because materials are taking longer to arrive.

New Orders and Business Activity Lose Momentum

New orders fell to 55.9 in October from 59.8 a month earlier, a 3.9-point drop. Orders continued to grow on balance, but the decline was much larger than the change in the headline PMI. September’s 59.8 had already been below August’s 60.9, making the October reading another step down from the stronger pace recorded late in the summer.

Business activity showed a similar pattern. That index slipped to 53.8 from 56.5 in September, a 2.7-point decline. It had stood at 61.7 in August, when activity was expanding at a considerably faster pace according to surveyed purchasing and supply managers. October’s level was still positive, but the direction of the last two monthly changes points to less widespread improvement among respondents.

These figures are diffusion indexes, not measures of output or orders expressed in dollars. An index of 55.9 does not mean orders increased 5.9 percent, and a 3.9-point monthly decline does not establish an equivalent fall in sales. The readings indicate how the balance of firms reporting increases, decreases or no change has shifted. They are useful early signals of business conditions, but do not provide a direct estimate of services-sector GDP.

The October PMI was below September and August, yet above July’s 54.1 reading, as recorded in ISM’s earlier reports. That pattern is more consistent with an expansion that has cooled than with a sudden deterioration. The weakness in orders and activity is nevertheless worth separating from the composite number because those two measures speak more directly to current demand.

Services Hiring Improves From a Weak Starting Point

Employment was the main counterweight to the softer demand readings. The services employment index rose to 51.4 in October from 50.1 in September. It was the second consecutive reading above 50 after August’s 47.8, which had indicated contraction in employment among respondents. Hiring conditions therefore appeared to improve, even as orders and business activity slowed.

That shift should not be mistaken for a large increase in the number of workers employed. September’s 50.1 was barely on the expansion side of the threshold, and October’s 51.4 remains a modest survey reading. The index records the direction of staffing changes reported by businesses; it does not count jobs added or lost across the economy. A survey can show more firms reporting hiring without revealing how many positions were created.

Official labor-market figures will provide a different perspective. The Bureau of Labor Statistics is scheduled to release the October employment report on Friday, November 6, at 8:30 a.m. Eastern Time. The payroll figures will offer a separate measure of how many jobs employers added or cut, rather than simply whether a greater share of services purchasing managers reported rising employment.

Input Costs Stay High as Supplier Delays Worsen

Price pressure remained prominent in the October survey. The prices index edged down to 73.0 from 74.0 in September, but stayed far above the 50 level associated with rising prices. October marked the seventh reading above 70 in eight months, according to reporting on the ISM release. The smaller number suggests price increases became somewhat less widespread, not that the prices businesses paid were falling overall.

Supplier delivery times moved in the opposite direction. The supplier deliveries index rose to 56.7 from 53.2, indicating that deliveries were slowing more widely. This measure works differently from the demand indexes: a reading above 50 means suppliers generally took longer to deliver, not that deliveries improved. Lengthening lead times can be a symptom of strong orders, but supply disruptions and shortages can produce the same result.

Steve Miller, chair of ISM’s Services Business Survey Committee, identified tariffs and fuel costs as recurring supply-chain concerns among respondents. He also indicated that many businesses had not yet absorbed the full effect of those costs or passed them through to customers. That makes the present pricing reading a warning about persistent input pressures, although the survey cannot establish how much of those costs will ultimately show up in consumer prices.

Fuel and freight expenses can affect services companies well beyond transport businesses. Restaurants, health-care providers, retailers and professional-service firms may face costs through purchased goods or outside suppliers even when their own output is not a physical product. The survey’s industry-wide prices index does not show that every category is experiencing the same pressure, and it should not be confused with a consumer inflation rate.

Mixed PMI Signals Add to the Inflation Debate

Two days before the services release, ISM had reported an increase in its manufacturing PMI to 55.5 in October from 54.5 in September. Factory activity expanded at a faster pace, while the services headline eased. Both surveys remained in expansion territory, suggesting growth was continuing across the two broad areas of private-sector activity even though their month-to-month directions differed.

Manufacturers were also reporting elevated input costs. ISM’s manufacturing prices index was 75.2 in October, down from 77.9 in September. The readings are not interchangeable with the services survey or with official inflation measures, but together they show why cost pressures remain part of the economic picture despite continued business expansion.

At its October 28 meeting, the Federal Reserve held its policy rate target at 3.75 percent to 4 percent and said inflation remained elevated. October’s services survey adds information about purchasing managers’ current costs, demand and hiring, but a single PMI release does not determine the next monetary-policy decision. The central bank also considers official price, employment and spending data.

The immediate labor-market comparison will come with the November 6 employment report. The next scheduled ISM services release, covering November, is due December 3. Those readings will help establish whether October’s softer demand indicators were a temporary pause or the beginning of a more sustained moderation in services growth.