Not since the beginning months of the COVID-19 pandemic has the U.S. service industry grown so slowly.
In October, the Institute for Supply Management’s (ISM) non-manufacturing PMI dropped to 54.4 from 56.7 the month prior, the lowest recording since May 2020. One survey respondent told the ISM it’s “become more challenging to maintain our level of service due to increased demand, extended supplier lead times, and the hyper-competitive employment market.”
Economists had predicted a more modest fall, forecasting the PMI to lower to 55.5, according to a poll conducted by Reuters.
Readings above 50 indicate expansion, while those below imply contraction. At present, over two-thirds of the U.S. economy comprises the services sector.
One survey respondent who works in the construction industry noted, “Customers are starting to delay projects and/or are entering smaller-scale scopes of work. We believe this is a continuation of an uncertain economic environment.”
This year, the Fed’s aggressive series of interest rate tightenings has slowed demand, and on Wednesday, the central bank implemented yet another 75-basis point hike. While additional rate increases are possible, the Federal Reserve has signaled that any upward moves will likely be more subtle in the future.
Despite Fed tightening, the prices paid by services industries for inputs also worsened, reaching 70.7 this month, up from 68.7 in September.
While inflation on goods is softening, it is driving service prices up as demand shifts back towards the sector. As a result, on balance, overall inflation may persist at elevated levels for some time, Reuters reported.
One survey respondent working in the accommodation and food services sector claimed they have witnessed conditions improving. “Despite the negative inflation news, higher gas prices, and concerns of a recession, our restaurant sales have been resilient during what is typically a seasonal slump,” they told ISM.
“We are positive to 2019 [pre-coronavirus pandemic], and traffic is down only about 4 percent, so it’s recovering. Staffing and supply chain challenges are improving, [and we are] seeing some decline in key commodities,” they continued.
The ISM survey showed that the services industry supplier deliveries index increased from 53.9 in September to 56.2 in October. Readings above 50 imply slower deliveries.
“Supplier deliveries continued to slow, at a faster rate in October,” said Anthony Nieves, chair of the institute for supply management services business survey committee. “Based on comments from business survey committee respondents, growth rates and business levels have cooled.”
“There are still challenges in hiring qualified workers, and due to uncertainty regarding economic conditions, some companies are holding off on backfilling open positions,” Nieves said. “Supply chain and logistical issues persist but are not as encumbering as they were earlier in the year.”