PMI Services Review- Input pricing pressures rising

In September, the S&P Global US Services PMI reported solid growth, with the Business Activity Index at 55.2, slightly down from 55.7 in August. This decrease suggests a marginal slowdown in the service sector's growth but remains one of the strongest expansions seen over the past two and a half years. Services activity has now increased for 20 consecutive months, driven by strong demand, particularly boosted by the recent reduction in interest rates. Despite the slight dip, the service sector continues to experience robust output growth as new orders remain elevated.

One of the notable trends in the report is the strengthening of inflationary pressures. Input prices rose at the joint-fastest rate in a year, largely due to salary pressures and rising costs of manufactured goods. This increase in input costs has led many service providers to raise their selling prices, pushing selling price inflation to a six-month high. The rate of price increases, both for inputs and services sold, is well above pre-pandemic averages, signaling ongoing inflation concerns within the service sector.

New orders saw solid growth for the fifth consecutive month, although the pace of expansion was slightly softer than the 14-month high seen in August. The report highlights that new business, both domestic and from abroad, has remained strong, driven by increased client willingness to invest in new projects, particularly due to lower interest rates. The demand from foreign markets, while modest, continues to support overall new business growth.

In terms of exports, new business from abroad saw a slight increase, contributing to the overall rise in total new orders. While export growth was not as robust as domestic demand, it continues to play a supportive role in the expansion of the services sector. This aligns with the broader global trend of steady service sector demand despite some economic uncertainties.

Inflation remains a key focus within the report, with the strong growth of input prices largely driven by rising wages. Companies are experiencing significant cost pressures from higher salaries and are responding by increasing the prices they charge for services. This has resulted in rising inflationary pressures that could influence future monetary policy decisions, particularly in terms of how the Federal Reserve manages interest rates to control inflation.

The report also notes a drop in employment for the second month in a row, though the decline was marginal. Some companies have reduced staffing levels to manage costs, while others report staff shortages. This dynamic has led to a buildup of unfinished work as businesses face challenges in meeting the strong demand without enough workers. The increase in backlogs of work was the fastest since January, highlighting the impact of labor constraints on business operations.

Business confidence waned in September, with optimism about the year-ahead outlook falling to its lowest level since October 2022. Concerns over a potential economic slowdown, combined with the uncertainty surrounding the upcoming U.S. presidential election, have tempered expectations for future growth. Despite strong demand and growth, service providers are increasingly cautious about the potential headwinds that could affect their performance in the months ahead.