WASHINGTON (MaceNews) – The September Institute of Supply Management report on the momentum of the services economy – showing some slippage in the index to 50 – is part of a slowdown three years in the making, now burdened with spillovers from goods tariffs, the purchasing managers survey chief said Friday.
The latest reading of the major U.S. category of economic activity had a higher profile than usual given the government shutdown’s delay imposed on the September jobs report, the absence of which left market participants grasping at statistical straws. One such was the usually ignored data set from Revelio Labs which suggested nonfarm payrolls grew by a greater-than-expected 60,000. US. stock markets responded with more ebullient intraday records.
Yet, in the background the morning’s ISM report on the services economy was to some extent a cautionary tale. “It’s not a good trajectory,” survey chief Steve Miller said in a conference call with reporters. “We’re flat, we’re flat.”
Answering a question from Mace News, Miller said, “What we’re seeing is a slow deterioration, we’re seeing reduced growth.” He continued, “We’re seeing a consistent trend of a reduction in our growth rate over the last three years.”
“I can’t say definitively, you know, where we’re headed. I just know there’s nothing that’s showing we’re going to change trajectory,” he said. The month’s report was one of “no increase, no decrease.”
While the overall index moved to 50, right at the breakeven rate between expansion and contraction from August’s 52.0, the employment index actually improved a little, to 47.2 from 46.5. But the negatives were more numerous. The production index moved down to 49.9, contractionary territory, from August’s 55.0. New orders went down to 50.4 from 56.0.
Another positive was the lengthening of order backlogs, with its index showing increasing backups to 47.3 from August’s 40.4.
The ISM survey number for employment “doesn’t indicate there’s a crisis to fix,” Miller said. There’s concern among purchasing managers that Fed rate cuts, while helpful, shouldn’t go too far or be too rapid lest that “stoke” additional inflation. “I think there’s risk of it getting out of control if we do the same kind of things we did during the pandemic to stimulate demand.”
As in Wednesday’s ISM report on manufacturing, some respondents expressed concern about supply chain disruptions caused by sectoral tariffs on steel and aluminum.
Some Federal Reserve officials have said they would be concerned should they see signs that the inflationary effect of tariffs on goods were to spill over into services. According to Miller, that’s exactly what’s happening. “We’re seeing more commentary that the tariff impacts are actually flowing through.” It remains to be seen, he said, whether “that will actually impact final prices paid.”
Utilities are seeing prices rise for power supplies and transformers, he said, while retail and wholesale trade are “seeing impacts from tariffs.” The healthcare industry is also seeing the impact “so it’s pretty widespread.”
Also concerning, he said, was the way the inventory sentiment index is reflecting “either weak expectations of future orders or concerns over having the wrong inventory.” The index expanded for the 29th consecutive month registering 55.7 compared to August’s 55.5.
Purchasing managers are watching carefully to see “how strong the economy picks up and whether employment picks up and spending increases,” Miller said.