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U.S. Service Sector Remains Strong

The ISM services index surprised with an increase to 61.9 in September from 61.7 in August. This was higher than market expectations for a decline to 60. Combined with the manufacturing reading, the ISM Composite reading moved to 61.8 from 61.5 in August. Demand regained some of its losses last month with business activity expanding by 2.2 ppts to 62.3 and new orders growing by 0.3 ppts to 63.5. The new export orders sub-index continued to edge lower, easing by 1.1 ppts to 59.5.

Supply chain disruptions remain problematic. The delivery performance of suppliers (68.8) was 0.8 ppts faster in September, but still much slower relative the pre-pandemic average of 52 (a lower reading indicates faster deliveries). Meanwhile, the backlog of orders sub-index increased slightly to 61.9 from 61.3 in August.

Inventories dropped by 0.8 ppts to 46.1, while inventory sentiment increased to 46.3 (+4.9 ppts) – a slight improvement from the previous five months of readings in the low forties.

The employment sub-component continued to decline for the second month in September, but remains in expansionary territory with a reading of 53.0 (from 53.7 in August). Respondents continue to complain about low labor supply with comments like “employee flight to better-paying jobs and lack of a pipeline to replace” and “labor shortages experienced at all levels” painting a more vivid picture than the numeric value of the sub-index.

The prices paid component rose to 77.5 in September with all 18 industries reportedly paying higher prices for inputs.

Seventeen industries expanded in September. The only industry to report a decrease was Agriculture, Forestry, Fishing & Hunting.

Key Implications

The services sector surprised with continued robust growth and an index reading well above 60. What’s more, the index is primed by metrics indicating growing demand, while the supplier deliveries index – the major indicator for supply-chain disruptions – moderated. This is a favorable development, given a historically low level of inventories in the context of the current expansion. Before the pandemic, there were only two instances when the inventory sub-index was below 40 while the overall index was near 60. Since April of this year, we have observed it five times (including today’s reading).

Looking ahead, the services sector should continue to expand as consumers’ ability to spend is supported by excess saving and income growth. Meanwhile, based on the sentiment expressed in today’s report, firms’ are planning on keeping the pace of inventory restocking and hiring for the time being, while “demand remains very strong”. As long as the economy remains uninterrupted by another COVID-19 outbreak, solid fundamentals should keep the service sector recovery going strong.