US Services Sector Activity Slows in September as Price Pressures Reach 4-Year High

The U.S. services sector activity cooled during September because geopolitical tensions and supply chain constraints pushed input costs to their highest levels since mid-2022. The Institute for Supply Management (ISM) non-manufacturing Purchasing Managers' Index (PMI) fell to 54.9 in September, down from 55.4 in August.

Even with the dip in overall activity, the index remains in expansionary territory, because any reading above 50 signals growth. The underlying data highlights a shift in price dynamics that could complicate the inflation outlook.

"The prices index continues to trend markedly higher, and the uptick in supply chain stress and backlog of new orders suggest price pressures are building. With underlying growth strong, the economy can withstand additional policy tightening," noted the latest ISM survey report.

Inflationary Drivers and Supply Chain Stress

The ISM gauge of prices paid by businesses for materials and services reached 74.0 in September, marking the highest reading since July 2022. This surge in input costs is driven by external disruptions, as respondents pointed to specific logistical hurdles impacting their operations.

According to the survey, tariffs and rising fuel costs were the most frequently cited issues affecting supply chains. Respondents mentioned fuel costs twice as often as any other single factor impacting performance, reflecting the sensitivity of the domestic services sector to volatility in global energy markets.

What This Means for the Broader Economy

While the headline PMI figure indicates a slight deceleration, the persistent strength in the prices index suggests that inflationary headwinds remain a concern for service providers. Analysts are now looking toward the fourth quarter to determine if these cost pressures will translate into broader consumer price increases.

"We regard September's reading as consistent with our outlook for moderate job gains in the fourth quarter," according to the same report. The combination of resilient growth and rising input costs provides a complex backdrop for policy decisions, as the economy navigates the impact of geopolitical conflict on domestic supply lines.