US Services Growth Cools to 54.5 as New Orders Ease and Prices Stay High
America’s vast services sector grew at a slightly slower pace in October, as demand cooled and supply chains stayed under strain, keeping prices for businesses stubbornly high.
The Institute for Supply Management said on Wednesday that its Services PMI slipped to 54.5 last month, down from 54.9 in September. A reading above 50 signals expansion, so the sector — which accounts for more than two-thirds of US economic activity — has now grown for 28 consecutive months. But the details pointed to a softer start to the fourth quarter: new orders fell sharply, deliveries slowed, and the prices gauge barely moved from a very high level.
Economists polled by Reuters had expected the index to come in at 54.8, so the result was a modest miss against forecasts. Reuters reported that the survey suggested the economy began the final quarter of the year on solid footing, even as economists expect activity to slow, with consumer spending likely to pull back after two quarters of robust growth.
New orders cool sharply
The softening was concentrated in demand. The New Orders Index dropped 3.9 points to 55.9, its lowest level in four months, although it remained in expansion for a 17th consecutive month. The Business Activity Index fell 2.7 points to 53.8, leaving it 2.9 points below its 12-month average.
Inventories also eased, slipping to 55.4 from 57.8 in September. But backlogs kept building: the Backlog of Orders Index rose 1.4 points to 58.0, its highest since July 2022, as work piled up faster than firms could clear it.
New export orders swung back into growth, jumping 8.3 points to 55.2 after a single month of contraction, while imports rose for a fourth consecutive month to 54.2. Construction was again the only industry to report lower new orders, the third month in a row it did so.
Prices stay stubbornly high
Cost pressure barely moved. The Prices Index eased one point to 73.0 from 74.0 in September, but that was still the seventh reading above 70 in eight months, and it marked the 113th consecutive month in which services firms reported paying more for inputs. Its 12-month average rose to 69.2, the highest since April 2023.
No commodity was reported as down in price in October. Fuel was reported up in price for a ninth month in a row, and memory products for a 10th, while memory components were reported in short supply.
Tariffs and fuel costs remained the issues respondents cited most often as affecting their supply chains. “Tariffs and fuel cost impacts continued to be the most-cited issues impacting respondents’ supply chains,” ISM’s October report said, adding that many respondents had not yet seen the full impact of the cost increases or passed them through to customers — a warning that further price pressure could follow.
The Supplier Deliveries Index climbed 3.5 points to 56.7, meaning deliveries took longer for a 23rd consecutive month, which can push costs higher when materials and components arrive late.
Hiring holds up before Friday’s jobs report
Employment moved in the opposite direction to activity and orders, rising 1.3 points to 51.4 — its second straight month above 50 and its highest since February. The improvement lines up with other labour-market signals: ADP reported 86,000 new private-sector jobs in October, beating expectations of 70,000, and job openings climbed to 7.52 million in September.
The government’s closely watched employment report on Friday is expected to show payrolls rose by 65,000 in October after increasing by 29,000 in September, according to a Reuters survey of economists, with the unemployment rate forecast to hold steady at 4.2%.
Households are feeling the squeeze: real disposable income fell in September after being unchanged in August, and the saving rate stood at a four-year low of 3.8%.
What it means for the Federal Reserve
The combination of cooling demand and sticky prices leaves the Federal Reserve in a difficult spot. The central bank left its benchmark overnight interest rate unchanged at 3.75% to 4.00% last week while acknowledging that inflation “remains elevated”, and economists expect inflation to keep running above the Fed’s 2% target into 2027.
ISM’s manufacturing survey, released on Monday, showed a slight moderation in prices paid by factories in October. But in services, where most Americans work and spend, the cost pressure has barely budged — and with backlogs at a four-year high and many firms yet to pass higher costs on to customers, the relief may still be some way off.
The trade picture offered a small offset: the trade deficit narrowed to $105 billion in September as imports hit a record. ISM will release its November services report on 3 December, when the next test of demand — and of prices — will arrive.
