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MADRID. The U.S. services sector experienced a marked slowdown in September, with new orders falling to a nine-month low. However, the pace remained in line with expectations for strong economic growth in the third quarter. A survey by the Institute for Supply Management (ISM) showed that inflation in services remained high, while employment gradually declined.
The US economy has shown resilience even after the Federal Reserve (Fed) began raising interest rates 18 months ago to curb demand, suggesting that monetary policy may remain tight. Kurt Rankin is a senior economist at PNC Financial in Pittsburghstressed that the Fed’s strong “higher than longer” rate message could counter the downward pressure on economic momentum caused by last year’s rise in real interest rates.
The ISM non-manufacturing PMI fell to 53.6 in September from 54.5 in August.. While this indicates a slowdown, readings above 50 still signal growth in the services sector, which accounts for more than two-thirds of the economy. Estimates for third-quarter growth were boosted by a rebound in auto sales in September, although there are concerns that a strike by the United Auto Workers (UAW) could limit supplies.
Industry on the rise
Despite the challenges, forecasts for the third quarter point to annual growth of up to 4.9%, compared with modest growth of 2.1% in April-June. Thirteen industries experiencing growth include retail, mining, utilities, construction and government.. However, five industries, including accommodation and food services and wholesale trade, reported declines.
Overall, companies have given positive feedback, indicating a strong trend to shift spending away from commodities following phenomenal growth during the Covid-19 pandemic. Some sectors, such as accommodation and food services, have reported lower prices, but also cited persistent supply constraints. Retailers are gearing up for the holiday season, But management and support services firms saw lower volumes from banks and leasing companies, a sign of tightening lending, while bankruptcy work is growing.
ISM’s new orders gauge fell to 51.8 – the lowest level since December – suggesting some weakness. However, Wall Street rallied, the dollar fell against other currencies and US Treasuries rose. Despite the slowdown in new orders, service companies faced price increases, with twelve industries reporting growth. However, prices have fallen in some sectors, such as transport and warehousing.
A measure of prices paid by service companies was unchanged at 58.9, and some economists see it as a good predictor of personal consumption expenditures (PCE) inflation. The Fed closely monitors the PCE price index for a 2% inflation target. In August, the annual rate of growth in the PCE price index, which excludes food and energy, fell below 4% for the first time in more than two years.
Higher borrowing costs
From March 2022, the Fed increased the rate by 525 basis points to the current range of 5.25%-5.50%. Despite the higher cost of borrowing, the demand for labor remains high. The ISM services sector employment indicator fell to 53.4 from 54.7 in August, largely due to supply concerns.
Unlike the ADP National Employment Report, which showed a minimum of 89,000 jobs in September, the slowdown in labor market growth seems exaggerated. Economists caution against over-interpreting the ADP report and suggest waiting for a more complete report from the Labor Department. In the BLS report, private sector jobs were expected to increase by 160,000 in September, with total nonfarm payrolls increasing by 170,000 after 187,000 in August.
Dario Garcia is an analyst at XTB
