U.S. Services Sector Stalls as Prices Edge Higher
The U.S. services sector stalled in September, signaling weaker economic momentum. A slowdown in new orders and subdued hiring pointed to a labor market struggling with weak demand and limited worker supply.
According to the Institute for Supply Management (ISM), services activity dropped as its non-manufacturing PMI fell to 50.0, the breakeven point, from 52.0 in August. Economists had expected a softer decline to 51.7. Services account for more than two-thirds of U.S. economic output.
Services Inflation Remains Elevated
The ISM report showed that the prices paid index stayed near three-year highs. Input costs remained stubbornly high, marking the 10th straight month above the 60 mark. Rising airline fares, restaurant costs, and hotel rates continued to drive inflation across the services industry.
Analysts warned that stubborn services inflation could complicate the Federal Reserve’s decision-making, even as markets anticipate another interest rate cut this month.
Impact of Government Shutdown
This survey carried extra weight after a funding lapse forced a U.S. government shutdown, delaying the monthly jobs report for the first time since 2013. Without labor data, the Fed is left with fewer signals to guide policy.
Tariffs and Business Uncertainty
Businesses across sectors said tariffs are weighing heavily. Construction companies reported higher costs for metal-based materials, while food and accommodation firms flagged rising prices on imports such as coffee and produce. Utilities and wholesale trade firms also cited weak demand.
Economists argue that tariffs, immigration raids, and the spread of artificial intelligence have created uncertainty that discourages hiring and investment.
Labor Market Stagnation
The ISM employment index rose slightly to 47.2 from 46.5 in August, but it still showed contraction for a fourth straight month. Companies are avoiding new hires, not replacing staff, and struggling to find qualified workers. This trend aligns with other data suggesting the U.S. labor market has stalled.
The Chicago Federal Reserve estimated the unemployment rate held steady at 4.3% in September. Job openings slipped to 0.98 for every unemployed worker, down from 1.0 in July.
Market Reaction
Despite weak data, Wall Street stocks rose on Friday, while the dollar dipped and Treasury yields moved higher. Investors expect the Fed to lower rates again this month to counter slowing growth.
A Difficult Position for the Fed
Economists caution that the Fed faces a dilemma: inflationary pressures remain, but growth is slowing. “The Fed is in a tough spot and now flying partly in the dark due to the delay of key releases,” said Sal Guatieri, senior economist at BMO Capital Markets. “If other data stay soft, the Fed will likely cut rates again this month despite sticky inflation.”
