(Bloomberg) -- US service providers expanded in September at the fastest pace since February 2023, driven by a flurry of orders and stronger business activity.
The Institute for Supply Management’s index of services advanced 3.4 points to 54.9 last month, the group said Thursday. Readings above 50 indicate expansion, and the latest figure exceeded all projections in a Bloomberg survey of economists.
The group’s new orders gauge jumped 6.4 points, the most since the start of 2023. Combined with a four-month high in a measure of business activity, which parallels the ISM’s factory output gauge, the data suggest the economy was on solid footing at the end of the third quarter.
“Amid robust consumer spending, the large services sector continues to add backbone to the expansion, likely weighing toward a smaller quarter-point rate cut from the Fed in November,” Sal Guatieri, senior economist at BMO Capital Market, said in a note. “But there are still a lot of data to come and the dockworkers’ strike is a wildcard.”
Treasury yields remained higher and the S&P 500 fluctuated after the figures as traders weighed the positive report against the risk of escalating conflict in the Middle East.
Twelve industries reported growth last month, led by real estate, management of companies and support services, and accommodation and food services.
The outlook in the coming weeks is clouded by the impact from the strike of dockworkers at East and Gulf coast ports, which if prolonged could weigh on many industries, as well as the November Presidential election.
“The stronger growth indicated by the index data was generally supported by panelists’ comments; however, concerns over political uncertainty are more prevalent than last month,” Steve Miller, chair of the ISM Services Business Survey Committee, said in a statement.
Rising Prices
The pickup in demand growth also helped to fuel an acceleration in prices paid for materials and services. The index of costs paid rose to 59.4 last month, the highest since January, from 57.3.
At the same time, there were more signs companies are pulling back on hiring. The ISM gauge of services employment fell to 48.1 from 50.2. Separate figures Thursday showed jobless claims rose last week to a level that is consistent with a limited number of layoffs.
“Pricing of supplies remains an issue with supply chains continuing to stabilize; one respondent voiced concern over potential port labor issues,” Miller said. “The interest-rate cut was welcomed; however, labor costs and availability continue to be a concern across most industries.”
In a call with reporters, Miller said the drop in the employment index reflected a smaller share of companies adding workers rather than an increase in layoffs.
The services survey stands in stark contrast to the group’s manufacturing figures, which earlier this week showed a sixth straight month of contraction. The services index is 7.7 points higher than its manufacturing counterpart, the largest gap since the end of 2019 and illustrating a bifurcated economy.
The services report also showed faster growth in inventories and imports in September, likely reflecting a push by companies to build stockpiles ahead of a strike by East and Gulf Coast dockworkers. Retailers were also stocking up on merchandise ahead of the holiday-shopping season.
Miller said the strike isn’t having a major impact yet because inventories are up, but “if we go any longer than a couple of weeks, that inventory buffer is going to be used up because it’ll take two months to recover.”
Select ISM Industry Comments
“Overall, economic factors are somewhat stable in the last month. Volatility was limited, based more on seasonal aspects than geopolitical issues or election season. That stability may be short-lived due to looming port labor issues heading into October.” — Accommodation & Food Services
“Business has been flat over the past three to six months, with concerns over growth in the near term.” — Agriculture & Forestry
“Housing construction continues to struggle with high interest rates. While the recent half-point cut is encouraging, it may take another 150 basis points to move the needle in sales.” — Construction
“Interest rates in both the housing and auto markets have been steadily declining, leading to a slight increase in auto and home loan applications.” — Finance & Insurance
“There is concern over the economy, and it feels like a lot of people are waiting to see which way the election goes in November before making a solid plan for 2025 and beyond.” — Professional, Scientific & Technical Services
“Prices remaining mostly steady, with a significant increase in fiscal year-end spending.” — Public Administration
“Starting to see positive year-over-year change in sales. Slow but steady.” — Retail Trade
“Sales have slowed a bit, with customers possibly holding back on new projects and awaiting the outcome of the presidential election.” — Wholesale Trade
--With assistance from Chris Middleton and Mark Niquette.
(Adds comment from ISM’s Miller)
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