The US services sector experienced a significant surge in September, reaching its highest level in a year and a half, fueled by robust growth in new orders. 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, surpassing the previous month’s 51.5 and marking 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 US economy. Moreover, the ISM considers PMI readings above 49 as a sign of overall economic growth.
The new orders index soared to 59.4, the highest since February 2023, driven by strong demand. This indicates a positive outlook for businesses in the coming months. However, the services employment index declined to 48.1 from 50.2 in August, signaling a slowdown in the labor 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, continue to face worker shortages, with job openings increasing by 80,000 in August while hires decreased. The unemployment rate is forecast to remain unchanged at 4.2%, having risen 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 labor market. The Atlanta Federal Reserve estimates that gross domestic product increased at a 2.5% annualized rate in the July-September quarter, following a 3.0% pace in the second quarter.
The government’s annual benchmark revisions, published last week, showed a stronger economic performance over 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 rising demand, businesses faced higher prices for inputs. While this could potentially impact inflation, the overall trajectory remains slow as goods prices continue to decline. 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. These continued rate cuts are likely to provide further support to the economy and help to stimulate growth in the coming months.
The strong performance of the services sector, coupled with the Federal Reserve’s easing of interest rates, paints a positive picture for the US economy. While some challenges remain, the overall outlook for the remainder of 2023 is promising.
