US Services Activity Reaches Eight-Month High Despite Weak Hiring
The U.S. services sector expanded at its fastest pace in eight months during October, supported by solid growth in new orders. However, weak employment data continued to reflect challenges in the labor market amid ongoing economic uncertainty and tariff pressures.
According to the Institute for Supply Management (ISM) report released Wednesday, business sentiment was mixed. Some companies described activity as flat and cited problems caused by import duties and the federal government shutdown, while others reported stable or improving conditions.
At first glance, the survey results suggest steady to strong economic momentum at the start of the fourth quarter. However, the prolonged government shutdown—the longest in U.S. history—has limited access to official data, clouding the overall economic picture.
“The survey shows a disconnect between positive economic growth and weak job creation,” said Bill Adams, Chief Economist at Comerica Bank.
ISM PMI Shows Broad Expansion Across Key Industries
The ISM Non-Manufacturing Purchasing Managers’ Index (PMI) rose to 52.4 in October from 50.0 in September, reaching its highest level since February. Economists surveyed by Reuters expected a smaller rise to 50.8. Since any reading above 50 indicates growth, the latest PMI confirms a healthy expansion in services, which make up over two-thirds of the U.S. economy.
The Congressional Budget Office (CBO) warned that the ongoing government shutdown could shave between 1 and 2 percentage points off GDP in the fourth quarter, though most losses are expected to be recovered later. Still, between $7 billion and $14 billion may be permanently lost.
The U.S. economy grew at a 3.8% annualized rate in Q2, while the delayed third-quarter GDP report remains unpublished due to the shutdown.
Growth Driven by Retail, Utilities, and Transportation
Eleven industries—including retail trade, utilities, transportation, and professional services—reported growth in October. Sectors such as finance, insurance, public administration, and construction showed contraction.
Some finance and insurance executives described activity as “flat,” adding that new tariffs continue to disrupt contracts and raise prices. Utility firms reported similar cost pressures, while retailers and transport companies said business conditions remained steady with no major supply chain issues.
Export Orders Stay Weak Amid Trade Tensions
New orders for U.S. services businesses climbed to 56.2 in October from 50.4 the previous month, showing robust domestic demand. However, export orders and backlogs declined sharply, reflecting continued trade tensions following President Donald Trump’s tariffs on China, Canada, and other partners.
The U.S. Supreme Court recently heard arguments regarding the legality of these tariffs. Trump maintains that the import duties are essential for protecting American manufacturing.
Meanwhile, input prices rose slightly, with ISM’s price index increasing to 70.0 from 69.4, suggesting persistent cost inflation.
Federal Reserve Maintains Caution on Interest Rates
Economists said the elevated price index reinforces the Federal Reserve’s cautious stance on interest rate policy. The Fed recently cut its benchmark rate by 25 basis points, lowering it to the 3.75%–4.00% range, but policymakers remain wary of moving too quickly amid limited economic data.
“If you’re driving in the fog, this report says slow down,” noted John Ryding, Chief Economic Advisor at Brean Capital.
Labor Market Weakness Persists
Despite rising orders, employment remains soft. The ISM’s services employment index increased slightly to 48.2, marking the fifth straight month of contraction.
“The ongoing decline in the employment index shows a lack of confidence in sustained growth,” said Steve Miller, Chair of ISM’s Services Business Survey Committee.
Economists attribute the weak hiring to tariff-related uncertainty, AI-driven automation, and labor shortages linked to immigration raids.
The ADP National Employment Report showed private payrolls rising by 42,000 jobs in October after a decline of 29,000 in September, but sectors like professional services, information, and hospitality continued to lose jobs.
The official employment report remains delayed due to the government shutdown. Analysts also warned that October’s consumer inflation data may not be published on time, further complicating the outlook for policymakers.
“Employers aren’t adding many workers, but they’re not cutting heavily either,” said Oren Klachkin, Economist at Nationwide. “There’s something in this report for both hawks and doves at the Fed.”
