U.S. services sector growth eases as October price pressures stay elevated

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US services growth eases October

Highlights

The ISM nonmanufacturing PMI falls to 54.5 in October from 54.9 in September, missing expectations of 54.8, indicating slower U.S. services growth.
Supplier deliveries index climbs to 56.7 from 53.2, marking 23 consecutive months of delays, as the U.S.-Israel war and tariffs drive commodity shortages and higher energy prices.
The ISM prices paid index remains elevated at 73.0, suggesting persistent input cost pressures, while economists see inflation above the Fed's 2% target into 2027.

October ISM survey signals slower momentum

As reported by Reuters, citing the Institute for Supply Management, its nonmanufacturing Purchasing Managers' Index slips to 54.5 in October from 54.9 in September, slightly below economists' expectations for a 54.8 reading. A level above 50 still indicates expansion in the services sector, which accounts for more than two-thirds of U.S. economic activity.

The latest reading suggests the economy enters the fourth quarter on relatively firm footing, though economists expect broader activity to slow as consumer spending pulls back after two quarters of robust growth. Disposable household income, after adjusting for inflation and taxes, falls in September after being unchanged in August, while the saving rate stands at a four-year low of 3.8%.

New orders received by services businesses decrease to 55.9 from 59.8 in September, while the employment gauge edges up to 51.4 from 50.1. That modest improvement in hiring aligns with forecasts for moderate nonfarm payrolls growth in October.

Supply strains keep inflation outlook in focus

Supplier delivery performance deteriorates further, with the supplier deliveries index rising to 56.7 from 53.2 in September, a sign of slower deliveries. Deliveries have now slowed for 23 straight months, and the report links continuing strain to the ongoing U.S.-Israel war with Iran and tariffs on imports.

The Middle East conflict, now in its ninth month, boosts energy prices and causes shortages of commodities shipped through the Strait of Hormuz. Against that backdrop, the prices paid index eases only slightly to 73.0 from 74.0, indicating that input cost pressures remain high for service-sector businesses.

Economists expect inflation to remain above the Federal Reserve's 2% target into 2027. The Fed last Wednesday leaves its benchmark overnight interest rate in the 3.75% to 4.00% range while acknowledging inflation remains elevated, and economists expect the U.S. central bank to raise borrowing costs in December.

The government's employment report due Friday is expected to show payrolls increase by 65,000 in October after a 29,000 rise in September, according to a Reuters survey of economists. The unemployment rate is forecast to remain unchanged at 4.2%.

Our previous article on UBS Global Wealth Management’s Fed outlook highlighted how persistent inflation pressures led the bank to forecast a longer tightening cycle, with additional rate hikes expected in December and again in March 2027. We also noted that stronger goods and services inflation, along with risks from supply disruptions and trade policy uncertainty, were reinforcing expectations for higher-for-longer borrowing costs.

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