U.S. service sector activity jumped to a 1-1/2-year high in September amid strong growth in new orders, further evidence that the economy remained on solid footing in the third quarter.
The Institute for Supply Management (ISM) said on Thursday that its non-manufacturing purchasing managers’ index (PMI) accelerated to 54.9 last month, the highest level since February 2023, from 51.5 in August.
A PMI reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of the economy. The ISM considers PMI readings above 49 over time to generally indicate an expansion in the overall economy. Economists polled by Reuters had forecast the services PMI would rise to 51.7.
The survey joined fairly upbeat August data on consumer spending and a narrowing goods trade deficit in suggesting the economy retained much of its momentum from the second quarter.
The Atlanta Federal Reserve estimates that gross domestic product rose at an annualized rate of 2.5% in the July-September quarter. The economy grew at a rate of 3.0% in the second quarter. Annual reviews of government benchmarks released last week showed stronger economic performance over the past three years than previously reported.
The ISM survey’s new orders measure rose to 59.4, also the highest level since February 2023, from 53.0 in August.
With the increase in demand, companies faced higher prices for inputs. This is unlikely to change the slow trajectory of inflation as goods prices continue to fall. The annual increase in inflation in August was the smallest in three and a half years.
The ISM measure of prices paid for service inputs rose to an eight-month high of 59.4 from 57.3 in August. Its measure of services employment fell to 48.1 from 50.2 in August, consistent with a slowdown in the labor market.
Much of the moderation in job growth is due to cooling demand after sharp interest rate increases in 2022 and 2023, but there are some pockets of worker shortages, especially in the leisure and hospitality sector, where job offers increased by 80,000 in August, while hiring fell.
A constant rate of employment growth is expected for September. A Reuters poll forecast nonfarm payrolls would rise by 140,000 jobs last month, after rising 142,000 in August. Job gains averaged 202,000 per month over the past year.
The unemployment rate is expected to remain unchanged at 4.2%. It has increased from 3.4% in April 2023.
Last month, the Federal Reserve 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, recognizing the growing risks to the labor market.
The US central bank is expected to cut rates again in November and December.
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