| Consensus | Consensus Range | Actual | Previous | |
|---|---|---|---|---|
| Index | 51.5 | 51.0 to 52.0 | 54.9 | 51.5 |
Highlights
Business activity in the US services sector accelerated in September for a third consecutive month of expansion thanks to stronger production and new orders while employment slowed but remained stable and inflationary pressures moderated, according to the latest survey by the Institute for Supply Management. The ISM index, which shows the directional change of economic activity, rose 3.4 percentage points to 54.9 in September, reaching the highest since 55.0 in February 2023 and coming in stronger than the consensus call of unchanged at 51.5. It followed a slight 0.1-point rise to 51.5 in August, a 5.1-point rebound to 52.4 in July from a 6.8-point dip to 47.3 in June, which was the lowest level since 45.4 in May 2020.
"The stronger growth indicated by the index data was generally supported by panelists' comments; however, concerns over political uncertainty are more prevalent than last month, Steve Miller, chair of the ISM Services Business Survey Committee, said in a statement."Pricing of supplies remains an issue with supply chains continuing to stabilize; one respondent voiced concern over potential port labor issues. The interest-rate cut was welcomed; however, labor costs and availability continue to be a concern across most industries."
The services sector continues to outperform the manufacturing industries, which in Tuesday's report, showed contraction for the sixth straight month in September on continued sluggish demand as firms remain reluctant to invest in capacity amid uncertainty over the pace of the Federal Reserve's unwinding of its tight monetary policy and the outcome of the presidential election next month.
Looking ahead, Miller said, interest rates on auto loans and mortgage rates have already come down ahead of the Federal Reserve's rate cut in September and more rate reductions projected by Fed policymakers should support the sector toward yearend after an historically weak third quarter.
"The wild card right now is how long the port strikes last," Miller said."Inventories are up, which is a good thing…and trucking companies are already positioning capacity out of the west coast." Sector inventories are likely to be depleted in two weeks if the dock workers continue to walk off the job, Miller estimates. East and Gulf coasts cargo-handlers launched their first large-scale strike in nearly 50 years this week, demanding higher wages and job security against automation.
"What I've been hearing (is that) a week-long strike is going to have a month impact in terms of recovery," Miller said, adding that there are already shortages of electrical components for transformers which could hurt the construction industry. On the bright side, he said,"Christmas time retail products are already here."
Miller noted that imports were up in September and there were more comments by ISM member firms discussing labor actions, indicating services providers were trying to cope with more strike-prone unions in the US and Canada. Timothy Fiore, the ISM manufacturing chief, told reporters Tuesday that the main gateway for the transpacific shipping ferrying goods from Asia the world's production hub is on the West coast, downplaying the overall impact of the East coast industrial action on US imports.
Of the four sub-indexes that directly factor into the services PMI, the business activity/production index rose 6.6 points to 59.9 after falling 1.0 point to 53.3 in August. The new orders index also gained a solid 6.4 points to 59.4.
The employment index fell 2.1 points to 48.1 in September after slipping 0.9 point to 50.2 in August. It reflects a decrease in the number of firms hiring more after some of them had already expanded payrolls in July and August and thus saw balanced employment levels in September, Miller told reporters. It does not show a contracting trend, he said. The supplier deliveries index the only ISM index that is inversed stood at 52.1, up 2.5 points from 49.6 in August, indicating slower deliveries after supply chains had recovered from the long lead times during the pandemic.
Miller said inflationary pressures have been easing, noting that a 2.1-point uptick to 59.4 in the prices paid index in September is not concerning given that the 12-month moving average is at 58.0, lower than 62.2 seen a year earlier and 79.8 two years ago.
"The stronger growth indicated by the index data was generally supported by panelists' comments; however, concerns over political uncertainty are more prevalent than last month, Steve Miller, chair of the ISM Services Business Survey Committee, said in a statement."Pricing of supplies remains an issue with supply chains continuing to stabilize; one respondent voiced concern over potential port labor issues. The interest-rate cut was welcomed; however, labor costs and availability continue to be a concern across most industries."
The services sector continues to outperform the manufacturing industries, which in Tuesday's report, showed contraction for the sixth straight month in September on continued sluggish demand as firms remain reluctant to invest in capacity amid uncertainty over the pace of the Federal Reserve's unwinding of its tight monetary policy and the outcome of the presidential election next month.
Looking ahead, Miller said, interest rates on auto loans and mortgage rates have already come down ahead of the Federal Reserve's rate cut in September and more rate reductions projected by Fed policymakers should support the sector toward yearend after an historically weak third quarter.
"The wild card right now is how long the port strikes last," Miller said."Inventories are up, which is a good thing…and trucking companies are already positioning capacity out of the west coast." Sector inventories are likely to be depleted in two weeks if the dock workers continue to walk off the job, Miller estimates. East and Gulf coasts cargo-handlers launched their first large-scale strike in nearly 50 years this week, demanding higher wages and job security against automation.
"What I've been hearing (is that) a week-long strike is going to have a month impact in terms of recovery," Miller said, adding that there are already shortages of electrical components for transformers which could hurt the construction industry. On the bright side, he said,"Christmas time retail products are already here."
Miller noted that imports were up in September and there were more comments by ISM member firms discussing labor actions, indicating services providers were trying to cope with more strike-prone unions in the US and Canada. Timothy Fiore, the ISM manufacturing chief, told reporters Tuesday that the main gateway for the transpacific shipping ferrying goods from Asia the world's production hub is on the West coast, downplaying the overall impact of the East coast industrial action on US imports.
Of the four sub-indexes that directly factor into the services PMI, the business activity/production index rose 6.6 points to 59.9 after falling 1.0 point to 53.3 in August. The new orders index also gained a solid 6.4 points to 59.4.
The employment index fell 2.1 points to 48.1 in September after slipping 0.9 point to 50.2 in August. It reflects a decrease in the number of firms hiring more after some of them had already expanded payrolls in July and August and thus saw balanced employment levels in September, Miller told reporters. It does not show a contracting trend, he said. The supplier deliveries index the only ISM index that is inversed stood at 52.1, up 2.5 points from 49.6 in August, indicating slower deliveries after supply chains had recovered from the long lead times during the pandemic.
Miller said inflationary pressures have been easing, noting that a 2.1-point uptick to 59.4 in the prices paid index in September is not concerning given that the 12-month moving average is at 58.0, lower than 62.2 seen a year earlier and 79.8 two years ago.
Market Consensus Before Announcement
ISM services in August, at 51.5, added another tick to July's strong rebound from June's dip to 48.8. September's consensus is unchanged at 51.5.
Definition
Producing a monthly composite on general activity tracked in volumes, the Institute for Supply Management surveys several hundred service-providing firms from 16 industries (construction and mining are included). The services composite index has four equally weighted components: business activity (closely related to a production index), new orders, employment, and supplier deliveries (also known as vendor performance). The first three components are seasonally adjusted but the supplier deliveries index does not have statistically significant seasonality and is not adjusted. For the composite index, a reading above 50 percent indicates that the services economy is generally expanding; below 50 percent indicates that it is generally declining. The supplier deliveries component index requires extra explanation: a reading above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries.
Description
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM services index, investors will know what the economic backdrop is for the various markets. The services index is a composite of four equally weighted components: business activity, new orders, employment, and supplier deliveries. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly -- and causing potential inflationary pressures. While the ISM manufacturing index has a long history that dates to the 1940s, this report goes back to 1997. Note that in 2020 the ISM changed the name of the report to services from non-manufacturing though it continues to track two key goods producing industries: construction and mining.
