Business activity in the U.S. services sector unexpectedly accelerated in October for a fourth straight month of expansion as more firms hired workers, but the uptick was also caused by slower supply deliveries in the wake of powerful hurricanes while new orders eased after a surge, data from the Institute for Supply Management showed. The ISM index, which shows the directional change of economic activity, rose 1.1 points to 56.0 the highest since 56.4 in July 2022 on top of a solid 3.4-point gain to 54.9 in September. It was much stronger than the consensus forecast of 53.5.

"Concerns over political uncertainty were again more prevalent than the previous month," Steve Miller, chair of the ISM Services Business Survey Committee, said in a statement. The key word in comments from surveyed firms is a"post-election" pickup after the current wait-and-see mode among many customers."Impacts from hurricanes and ports labor turbulence were mentioned frequently, although several panelists mentioned that the longshoremen's strike had less of an impact than feared due to its short duration," he said.

Miller said he"wouldn't be surprised" if the main index pulled back, projecting that it is likely to slip back to 53 or 54 in November, closer to the latest 12-month moving average of 52.2, as the full impact of the hurricanes wanes. He noted, however, that positive responses are spreading, with 14 out of the 18 industries reporting expansion in October.

The services sector continues to outperform the manufacturing industries, which in Friday's report, showed contraction for the seventh straight month in October as firms remain reluctant to invest in new capacity on concerns that federal fiscal policy could be inflationary whichever major party wins the Nov. 5 election. Miller noted that"there wasn't a comment" by services firms on any concerns about a possible inflationary policy.

Of the four sub-indexes that directly factor into the services PMI, the business activity/production index dipped 2.7 points to 57.2 in October after rising 6.6 points to 59.9 in September. The new orders index recorded a similar 57.4, also down 2.0 points from 59.4 in the prior month when it gained a solid 6.4 points. Both indexes were in expansion for the fourth consecutive month after contracting in June for just the second time since the pandemic-hit May 2020.

The employment index jumped 4.9 points to 53.0 from 48.1 the previous month, hitting the highest since 54.1 in August 2023 and showing expansion (above 50) for the third time in four months. Some firms hired seasonal labor for holiday peak activity while others continued struggling to backfill the positions left open by normal attrition. The ratio between the firms reporting a rise in payrolls and those seeing a fall was 9 to 5 in October, improving from 6 to 9 in September, Miller said. In September, fewer firms hired workers after some of them had already expanded their workforce in July and August.

The supplier deliveries index the only ISM index that is inversed stood at 56.4, up 4.3 points from 52.1 in September, staying above the key level of 50 and thus indicating slower deliveries for the second straight month after two months of faster deliveries. Supply chains have generally recovered from the long lead times during the pandemic. Miller expects the index to fall a few points in November, closer to a range of 45 to 52.

Among other subindexes, the prices paid index fell 1.3 points to 58.1 in October after rising 2.1 points to 59.4 in September. Its 12-month moving average was unchanged at 58.0."Services cost remains elevated but easier to negotiate," a firm in the accommodations and food services industry told the ISM."Commodity pricing is stabilizing as inflation concerns ease," a company in the professional, scientific and technical services category said.

The services sector has been holding up remarkably well relative to manufacturing, with a nice expansion continuing. Forecasters still expect the ISM services index to recede to 53.5 in October after a surprising uptick to 54.9 in September from 51.5 in August.

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.

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.