According to new data released on Friday, the US services sector is teetering on the edge of contraction, sparking concerns about the country’s economic trajectory. According to the S&P Global Flash US Services Business Activity Index, September saw a dip to a reading of 50.2, marking an eight-month low and a drop from August’s 50.5. Economists surveyed by Bloomberg had anticipated a rebound, with expectations set at 50.7 for September. In addition, the composite PMI registered at 50.1, marking a seven-month low and down from August’s 50.2, primarily driven by the declining US services sector. It’s important to note that any reading above 50 for these indexes represents expansion, while readings below 50 indicate contraction.
“PMI data for September added to concerns regarding the trajectory of demand conditions in the US economy following interest rate hikes and elevated inflation,” remarked Siân Jones, Principal Economist at S&P Global Market Intelligence. “Although the overall Output Index remained above the 50.0 mark, it was only fractionally so, with a broad stagnation in total activity signaled for the second month running. The service sector lost further momentum, with the contraction in new orders gaining speed.”
Since reaching 13-month highs in May, the manufacturing sector has demonstrated consistent recovery, while the services sector has been a drag on overall output. S&P Global pointed out that new orders for services companies are declining at a faster pace compared to manufacturers. Companies shared with S&P Global that high interest rates, inflationary pressures, larger wage bills, and rising oil prices have all contributed to dampened demand, ultimately driving up operating expenses. As a result, new businesses in the US services sector grew at their slowest rate since December 2022.
In September, business confidence across the private sector also plummeted to a nine-month low. Companies cited strikes, inflation, and higher interest rates as primary concerns. Economists are warning of a potential economic slowdown in the near future, citing the impacts of factors such as the United Auto Workers strikes and the resumption of student loan payments, coupled with the potential lagging effects of monetary policy.
Despite this slowdown, S&P Global’s report offers a glimmer of hope in the labor market. The rate of job creation in September reached its fastest pace since May. Businesses reported greater ease in filling open roles, aligning with trends observed in the Bureau of Labor Statistics’ monthly report, which revealed that the US economy added 187,000 jobs in August, up from 157,000 in July. Concurrently, unemployment rose to 3.8% from 3.5% the previous month due to more Americans entering the workforce.
“Subdued demand did not translate into overall job losses in September as a greater ability to find and retain employees led to a quicker rise in employment growth,” Jones stated in Friday’s release. “That said, the boost to hiring from rising candidate availability may not be sustained amid evidence of burgeoning spare capacity and dwindling backlogs, which have previously supported workloads.”
In its latest decision, the Federal Reserve opted to keep interest rates unchanged at a 22-year high, signaling one more hike later in the year. The Federal Reserve has long been walking a tightrope with interest rate hikes, striving to balance economic growth and inflation. The potential impacts of these moves on the economy continue to concern economists, prompting a close watch on US services sector activity.
Despite the overall slowdown in economic activity, the US labor market has exhibited remarkable resilience thus far. Integrating other economic indicators with this services sector data could offer a clearer picture of the future trajectory of the US economy.
Source: Yahoo Finance
