Services Sector Maintains Expansion Despite Slower Momentum

The U.S. services sector continued to expand in September, although the pace of growth moderated. The ISM Services PMI declined to 54.9 from 55.4 in August, slightly below expectations of 55.0.

Despite the decline, the index remained above the 50-point threshold separating expansion from contraction for the 27th consecutive month. The reading indicates that service-sector activity continues to grow, even as several underlying components point to a more uneven operating environment.

Business Activity and New Orders Lose Momentum

The slowdown was more visible in the Business Activity Index, which fell to 56.5 from 61.7. New orders also moderated, reaching 59.8.

While both measures remained firmly above the expansion threshold, the declines suggest that demand and operating activity are no longer accelerating at the pace seen previously. The combination of slower activity and continued price pressures creates a more complicated environment for businesses and policymakers.

Employment Returns to Expansion

One encouraging development came from employment. The Employment Index moved back above the 50-point threshold to 50.1 after two consecutive months of contraction.

The marginal increase suggests that labor conditions within the services sector stabilized during September. However, the relatively narrow move above 50 indicates that employment growth remains limited rather than signaling a sharp acceleration in hiring.

Price Pressures Become the Central Concern

The strongest signal in the report came from prices. The Services Prices Index rose to 74, its highest level since July 2022 and its sixth reading above 70 in the past seven months.

The persistence of elevated prices suggests that inflationary pressures remain embedded in the services economy. Businesses continued to identify tariffs, fuel expenses and supply-chain constraints as important challenges, potentially keeping operating costs elevated even as overall growth moderates.

Backlogs Strengthen While Export Orders Weaken

Backlogs provided another indication that underlying demand remains substantial. The Backlog of Orders Index increased to 56.6, its highest level since July 2022.

At the same time, export orders weakened considerably, falling below 50 for the first time in eight months. The divergence suggests that domestic activity remains more resilient than external demand, although the source data does not identify the specific reasons behind the deterioration in export orders.

Supplier deliveries also slowed, with the corresponding index rising to 53.2, adding another indication of pressure within business supply chains.

What the September Data Signals

The September services report presents a mixed picture for the U.S. economy. Continued expansion and a return to employment growth point to resilience, while weaker business activity and new orders suggest that momentum is moderating.

The more significant concern is the renewed acceleration in prices. With the Prices Index reaching its highest level since July 2022, businesses continue to face cost pressures from tariffs, fuel and supply-chain constraints.

The balance between slower growth and persistent inflation will remain important for markets. If services activity continues to cool while price pressures remain elevated, the economic environment could become increasingly challenging for businesses and policymakers.