ISM Survey: U.S. Service Sector Weakens, Hiring and Business Activity Both Under Pressure
The ISM survey shows that the U.S. service sector's business activity index fell below the breakeven line in September, marking the first contraction since May 2022, with employment remaining in contraction territory. New orders are still expanding but at a slower pace, with seven industries reporting contraction. The Fed cut interest rates by 25 basis points last month, but officials remain cautious about the pace of further cuts.
At a Glance
- Data released by the Institute for Supply Management (ISM) on Friday showed that U.S. services sector activity weakened in September, with companies delaying hiring and the business activity index falling into contraction territory for the first time since May 2022.
- Although the new orders index remained in expansion territory, growth slowed; the backlog of orders index fell less in September than in August. ISM's survey of purchasing managers showed that seven services industries reported contraction and ten reported expansion, two fewer than in August.
- Steve Miller, chair of the ISM Services Business Survey Committee, said in a statement that respondents generally reported "moderate or weak growth." "Employment continued to be in contraction territory, due to companies delaying hiring and difficulty finding qualified workers," he said.
In-Depth Analysis
Weakness in the labor market prompted the Federal Reserve to cut its benchmark interest rate by 25 basis points last month, its first monetary easing this year. In the latest dot plot, Fed officials projected two additional 25-basis-point rate cuts by the end of 2025, on top of the current range of 4% to 4.25%.
A cooling labor market and stagnant services sector growth—services contribute nearly 70% of U.S. GDP growth—are two trends in the current economy that simultaneously show strong and weak signals. Data from the U.S. Bureau of Economic Analysis (BEA) released on September 26 showed that consumer spending rose 0.4% month-over-month in August, flat with July; however, the Fed's preferred inflation gauge—the Personal Consumption Expenditures (PCE) price index excluding volatile energy and food prices—remained at 2.9% year-over-year.
Additionally, the Atlanta Fed estimated on Wednesday that the U.S. economy grew at an annualized rate of 3.8% in the third quarter, well above the average of 2.4% from 2019 to 2024.
However, with the federal government shutdown on Wednesday, official economic data releases have been suspended, making economic forecasting even more difficult. Most notably, the Bureau of Labor Statistics (BLS) indefinitely postponed the September nonfarm payrolls report originally scheduled for Friday.
The missing data complicates judgments for corporate executives, investors, and Fed policymakers. Chicago Fed President Austan Goolsbee said on Friday: "There's no doubt that the best employment data in the world comes from the Bureau of Labor Statistics. We need this data, we want this data." He suggested that economists could use private-sector data and state unemployment claims to gauge the labor market's pulse, but over time, these estimates would "drift further from the truth."
Goolsbee noted that the Fed faces a particularly tricky juncture in monetary policy, potentially receiving lagging data on both employment and inflation simultaneously. He said policymakers carry the dual mandate from Congress to ensure price stability and maximum employment. "The inflation rebound we're seeing, coupled with deteriorating employment and wage data, puts the central bank in a dilemma—both sides of the dual mandate are deteriorating at the same time," he said.
Looking ahead to this month's and December's monetary policy meetings, Goolsbee said: "I am cautious about front-loading rate cuts and hoping inflation fades on its own."