–ISM’s Miller: Employment Up on Strong Customer Demand; Some Firms Hiring AI Workers, Others Use AI Tools to Replace Staff
By Max Sato
(MaceNews) – U.S. services sector business expansion slowed slightly in September after a seasonal boost in August, hit by stiff U.S. import duties and rising fuel and transportation costs amid the lingering Mideast conflict, but the sector managed to stay in growth territory for the 27th straight month thanks to historically high new orders.
At the same time, data released Monday also showed backlog orders remained high as many firms are scrambling to diversify supply sources to alleviate slow deliveries and low availabilities of some goods to meet strong customer demand.
The purchasing managers index for services compiled by the Institute for Supply Management, which indicates direction of activity, posted its first drop in three months, down 0.5 percentage point at 54.9, after rising 1.3 points to a six-month high of 55.4 in August. It came in largely in line with the consensus forecast of 55.0. Thirteen industries indicated growth in September, up from 12 in August, while four reported contraction, down from five in the prior month.
The index is 0.8 point above its 12-month moving average of 54.1 in September and above the average for the 12th straight month. The 12-month moving average at 54.1 is the highest since 54.4 in April 2023, when the economy was recovering from the pandemic.
“Tariffs and fuel cost impacts were the most cited issues impacting respondents’ supply chains; in fact, fuel costs were mentioned twice as often as any other single issue impacting performance,” ISM Services Business Survey Committee Chair Steve Miller said in a statement. “Supply chain constraints were also a top concern of respondents and were impacting both lead times and costs.”
Supplier deliveries have been slow for nearly two years and prices that service providers pay remain at the highest in four years.
“Weekly price increases are the norm these days on commodities products (copper, aluminum and polyvinyl chloride),” a wholesaler told the ISM. “We are constantly reaching out to any and all suppliers we conduct business with to secure product to meet customer demand.”
A utility service provider also noted that business activity remains strong but supply chain conditions continue to be challenging. “Utilities and materials are experiencing slower availability, with steel particularly difficult to source domestically,” the firm said. “We are increasingly having to place orders internationally to secure required materials.”
The employment index’s first reading above the neutral line of 50 in three months seems to have resulted from increasing backlogs as well as high levels of business activity and new orders, Miller said. Last month he predicted that strong showings in business activity and new orders in the August report could signal a shift to increased employment in the services sector.
On the impact of the use of artificial intelligence, Miller told reporters that employment was down at some firms where they could not find qualified AI specialists while other firms adopted AI tools to replace workers including those tasked with basic computer programming. The later cases are still a relatively small portion, he said.
“For the first time, we’ve seen specific comments about reducing positions or reduced total employment as a result of the AI roles,” he said.
Asked whether the recent move among major central banks to raise interests to fight inflation will hurt the U.S. services sector as a whole because of higher borrowing costs for households and businesses, Miller repeated his earlier comments that the ISM’s twice-annual survey released in June indicated higher capital investment in the second half of 2026 due to higher interest rates.
“I think the increase in interest rate will definitely have an impact on at least the growth rate for services industries and a direct impact for particularly residential housing and the construction industry,” Miller said, adding that construction showed contraction for the second straight month in an otherwise busy season.
A construction firm told the ISM survey: “Interest rates continue to drive buyers out of the market. Half of buyers walking through the door cannot qualify to purchase.”
On the other hand, he said, the finance and insurance industry has been in growth territory since October 2025 except for August 2026, indicating higher interest rates (higher profit margins for lenders) and rising costs are not generating headwinds for the financial service providers.
All of the four sub-indexes that directly factor into the services PMI were in expansion territory (prior figures in parentheses).
Business activity/production 56.5 (61.7) -5.2; The index marked its first decline in three months after the August figure hit the highest since 62.7 in November 2022. The index has been fluctuating widely. It rose 2.5 points to 59.9 in February to hit the highest since 59.9 in May 2024 before slumping 6.0 points in March to 53.9, the lowest since 49.9 in September 2025.
New orders 59.8 (60.9) -1.1; The index flowed a 3.7-poing gain in August when it reached the highest since 61.6 in February 2023. Earlier, the index rose 2.0 points to 60.6 in March 2026 to hit the highest since 61.6 in February 2023 before slipping 7.1 points to 53.5 in April.
Employment 50.1 (47.8) +2.3; Back in growth after two months of contraction. The index has been above the neutral level of 50 for the fifth time in the last 12 months. Earlier, it slumped 6.6 points to 45.2 in March, falling to the lowest since 43.7 in December 2023 only a month after it rose 1.5 points to 51.8 to reach the highest since 53.9 in February 2025.
Supplier deliveries 53.2 (51.3) +1.9; The index indicated slower performance for the 22nd month in a row (above 50 means slower deliveries). The August reading of 51.3 was the lowest since 50.8 in October 2025.
Among other sub-indexes:
Prices 74.0 (72.6) +1.4; Above 60 for 22 months in a row and above 70 for the sixth time in seven months. The latest level of 74.0 is highest since 74.5 in July 2022. Earlier, the index fell 3.6 points to 63.0 in February, the lowest since 60.9 in March 2025.
Backlog orders 56.6 (55.6) +1.0;The highest since 58.3 in July 2022. The index has been in expansion territory for eight straight months, its longest continuous growth since a string of 26 months that ended in February 2023.
Inventories 57.8 (56.7) +1.1; The index showed expansion (above 50) for the eighth straight month. It follows a 5.3-poing rise to 56.7 in August. The index slumped 9.1 points in January to 45.1, the lowest since 45.1 in December 2022. It rose 9.4 points to 62.5 in May, matching the record high of 62.5 hit in May 2010.