WASHINGTON: The US services industry grew at its slowest pace in nearly 2-1/2 years in October, but businesses continue to face higher prices for inputs, confirming that inflation is shifting from goods to services.
The Institute for Supply Management (ISM) said on Thursday that its non-manufacturing PMI fell to 54.4 last month, the lowest reading since May 2020, from 56.7 in September.
Economists polled by Reuters had forecast the non-manufacturing PMI to fall to 55.5. A reading above 50 indicates expansion in the service sector, which accounts for more than two-thirds of US economic activity.
The Federal Reserve’s tight interest rate hikes are dampening demand in the overall economy.
The US central bank raised its policy rate by another three-quarters of a percentage point on Wednesday to 3.75% to 4.00%. However, it indicated that future increases in borrowing costs could be done in small steps for the “incremental tightening of monetary policy” enacted so far.
It was the fourth consecutive 75-basis-point rate hike as the Fed struggles to bring inflation back to its 2% target.
The ISM measure of new orders received by service businesses fell to 56.5 from 60.6 in September. Businesses, however, reported a sharp decline in exports, likely due to slower global growth and a stronger dollar.
US productivity rebounded modestly in the third quarter
A measure of prices paid by service industries for inputs rose to 70.7 from 68.7 in September.
That was in stark contrast to ISM’s manufacturing survey earlier this week, which showed raw material prices fell for the first time in 28 months in October and supplier supply performance was the best since 2009.
Product inflation is easing as demand returns to services The shift towards services suggests that overall inflation may take some time to come under control.
The ISM survey’s measure of service industry supplier supply rose to 56.2 last month from 53.9 in September. A reading above 50 indicates slow delivery. The backlog of unfinished work is slightly changed.
Its service industry employment measure fell to 49.1 from 53.0 in September. This marks the fifth time this year that the measure has contracted.
With job openings unexpectedly in September and 1.9 positions for every unemployed person, the decline is likely a function of a lack of workers.
Service businesses reported in an ISM survey in September that hiring is a challenge and qualified workers are scarce.