The ISM Services index stepped up in September, registering 54.9, up from 51.5 in August and well ahead of the 51.7 print expected. This is the third consecutive month of improvement and the strongest print since February 2023. Twelve industries of eighteen reported growth in September, up from ten in August.
The strong headline print was lifted by healthy gains in both the business activity (up to 59.9 from 53.3) and new orders (59.4 from 53.0) sub-indexes.
The prices paid sub-component ticked up again to 59.4 percentage points (pp) from 57.3 in August, and is now back above its 2019 average. The supplier deliveries sub-index flipped to 51.2 (from 49.6), indicating elongating supplier delivery times.
In contrast to indicators of stronger demand, the employment sub-component fell back into contraction territory again (48.1), and has now indicated shrinking payrolls in six of the nine months so far this year.
Key Implications
The services sector sprung back to life in September, lifted higher by activity and growing order books. While the strength of the print is certainly a surprise at this stage of the cycle, shrinking payrolls are a fly in the ointment. Upward pressure on input prices leading into the ongoing dockworker strike, also presents an upside to the inflation outlook.
Today’s report suggests that the economy still has some legs, with healthy demand figures from the services sector. Looking ahead, the Fed has been focused on prices and developments in the labor market, and more clarity on the latter point will come from Friday’s jobs report for September. That said, as the Fed looks to stick the soft landing, pockets of growth will be a welcome sign.
