US Services Keep Growing, but Input Prices Climb to Their Highest Since 2022
US services activity continued to expand in September, but input prices surged to their highest since 2022, complicating the Federal Reserve’s policy outlook as supply chain strains persist.
Chanan Zevin — Chief Editor and Head of Desks
Services Sector Maintains Growth Momentum
The US services sector continued its expansion in September, with the ISM Services PMI registering 54.9 percent, marking the 27th consecutive month in growth territory. This figure, while slightly down from August’s 55.4 percent, remains above the 50 percent threshold that signals expansion. The sector’s resilience reflects ongoing robust domestic demand, particularly in consumer spending and business investment. [S1][S2]
Despite the marginal decline, the PMI’s current level is consistent with strong economic growth in the third quarter. The 54.9 percent reading is also 0.8 percentage point above the 12-month average of 54.1 percent, underscoring the sector’s sustained momentum. Thirteen service industries reported growth in September, including wholesale trade, retail, utilities, and finance. [S1][S2]
The Business Activity Index, another key measure, remained in expansion territory at 56.5 percent, though it decreased by 5.2 percentage points from August’s 61.7 percent. New orders also moderated but stayed strong at 59.8 percent, just 1.1 percentage points below the previous month. These figures suggest that while growth is slowing, the services sector remains a key driver of the US economy. [S1]
Input Prices Reach Multi-Year Highs
Input prices for US services businesses surged in September, with the ISM Prices Index rising to 74 percent, its highest level since July 2022. This marks the sixth time in seven months that the index has exceeded 70 percent, reflecting persistent cost pressures across the sector. The 12-month average for the Prices Index also increased to 69 percent, the highest since March 2023. [S1]
The rise in input prices has been driven largely by higher fuel and commodity costs. Respondents to the ISM survey repeatedly cited fuel costs as a dominant concern, with diesel and gasoline prices reported as up for multiple consecutive months. The high cost of crude oil has also pushed nitrogen prices for agricultural use to near record highs. [S1][S2]
Supply chain constraints have further exacerbated price pressures. The number of commodities in short supply increased in September, with products such as switchgear, computers, and memory components being notable additions. Shipping containers from overseas were reported to be double the cost, contributing to broader price increases for businesses and consumers alike. [S1][S2]
Supply Chain Strains Intensify
Supply chain challenges intensified in September, as indicated by the Supplier Deliveries Index, which rose to 53.2 percent. This marks the 22nd consecutive month of slower supplier deliveries, a trend that typically accompanies periods of strong demand and economic growth. The index’s increase reverses a four-month decline, signaling renewed stress in logistics and procurement. [S1]
The ongoing conflict in the Middle East, particularly the U.S.-Israeli war with Iran, has contributed to these supply chain disruptions. Higher energy prices and shortages of commodities shipped through key transit points have impacted delivery times and input costs. Tariffs and fuel costs were the most frequently cited issues affecting supply chains, with fuel mentioned twice as often as any other factor. [S2]
A range of products, including steel, fuel, and memory components, was reported to be in short supply. These shortages have led to increased costs for freight and materials, with some farming businesses noting that the high price of diesel has dramatically raised freight expenses. Retailers also reported significant increases in shipping container costs, further straining supply chains. [S1][S2]
Labor Market and Employment Trends
The Employment Index for the services sector returned to slight expansion in September, registering 50.1 percent after two months in contraction. This reading is 2.3 percentage points higher than August’s 47.8 percent and moves above the 12-month average of 49 percent. The improvement is attributed to increasing backlogs and steady business activity. [S1]
Despite the uptick in the Employment Index, the sources do not specify the exact number of jobs added or lost in September. However, the modest expansion in employment suggests that labor market conditions remain tight, though growth rates have eased compared to earlier in the year. This analysis reflects the published evidence available for this edition.
Some industries, such as construction, reported that higher interest rates are driving buyers out of the market, with many unable to qualify for purchases. In finance and insurance, increased competition for deposits and higher funding costs are placing pressure on profitability and moderating growth expectations. These sector-specific challenges highlight the uneven impact of broader economic trends on employment. [S1]
Federal Reserve’s Policy Dilemma
The combination of persistent services sector growth and surging input prices presents a complex challenge for the Federal Reserve. While the strong PMI reading suggests the economy can withstand additional policy tightening, elevated price pressures raise concerns about inflation remaining above target into 2027. [S2]
Some analysts argue that the rising prices index strengthens the case for further interest rate hikes, potentially as soon as the upcoming Federal Reserve meetings. However, recent cooler-than-expected inflation readings for July and August, along with a sharp slowdown in nonfarm payroll growth in September, have reduced the likelihood of an imminent rate increase. [S2]
The sources do not specify the exact September payroll figure, but the overall context points to a delicate balancing act for policymakers. The Fed must weigh the risks of entrenched inflation against the potential for slower job growth and the impact of higher borrowing costs on sectors like construction and finance. [S2]