New data released on Friday indicates a concerning trend in the US services sector, as it edges closer to contraction. The S&P Global Flash US Services Business Activity Index recorded a reading of 50.2 in September, marking an eight-month low and a decline from August’s figure of 50.5. Economists, surveyed by Bloomberg, had anticipated a rebound in the services sector to a reading of 50.7 for September. However, the composite PMI stood at 50.1, a seven-month low and down from 50.2 in August, primarily driven by declines in the US services sector. In these indices, a reading above 50 denotes expansion, while figures below 50 signal contraction.
S&P Global Market Intelligence’s principal economist, Siân Jones, expressed concern, stating, “PMI data for September added to concerns regarding the trajectory of demand conditions in the US economy following interest rate hikes and elevated inflation.” She further noted that while the overall Output Index remained above the 50.0 mark, it did so only marginally, indicating a broad stagnation in total activity for the second consecutive month. The service sector experienced a loss of momentum, with the contraction in new orders intensifying.
Since reaching 13-month highs in May, the manufacturing sector has exhibited a continued recovery. However, the services sector has acted as a drag on overall output. S&P Global highlighted that new orders are declining at a faster pace for services companies compared to manufacturers. Companies conveyed to S&P Global that demand was adversely impacted by high interest rates and inflationary pressures, alongside increased wage bills and soaring oil prices, which led to elevated operating expenses. With reduced demand, new businesses in the US services sector grew at their slowest rate since December 2022.
Business confidence across the private sector also plummeted to a nine-month low in September, as companies cited strikes, inflation, and higher interest rates as significant concerns. Economists have cautioned about an impending slowdown, considering factors such as the effects of the United Auto Workers and the resumption of student loan payments, as well as potential delayed consequences of monetary policy.
Despite the slowdown, S&P Global’s report underscored the resilience of the labor market. The rate of job creation in September was the highest since May, as businesses reported greater ease in filling vacant positions. This trend aligns with the data from the Bureau of Labor Statistics’ monthly report, which revealed an addition of 187,000 jobs to the US economy in August, up from 157,000 in July. Concurrently, unemployment inched up to 3.8% from the previous month’s 3.5%, attributable to more Americans entering the workforce.
Jones highlighted in Friday’s release, “Subdued demand did not translate into overall job losses in September as a greater ability to find and retain employees led to a quicker rise in employment growth.” However, she cautioned that the boost in hiring from rising candidate availability may not be sustained, given evidence of burgeoning spare capacity and dwindling backlogs which have previously supported workloads.
The Federal Reserve, on Wednesday, maintained interest rates at a 22-year high, signaling an anticipated additional hike later this year. The Fed has long grappled with the delicate balance of interest rate adjustments in a bid to manage economic growth and inflation. Economists remain watchful of potential impacts on the economy resulting from these moves, closely monitoring the activity in the US services sector.
Despite the overall deceleration in activity, the US labor market has demonstrated remarkable resilience thus far. Combining this with other economic indicators could offer a more comprehensive outlook on the future of the US economy.
Source: Yahoo Finance
