U.S. economy took another hit in October—this time from unlikely source
The U.S. services sector slowed more than expected in October, adding to mounting concerns about a weakening economy.
The Institute for Supply Management’s non-manufacturing purchasing managers index (PMI) fell to 51.8 from 53.6 in September. It was the lowest reading in five months, extending a string of declines that began in August.
Non-manufacturing PMI is a monthly tracker of the U.S. services sector, which accounts for more than 75% of GDP. On the PMI scale, 50 is usually seen as the cut-off point between expansion and contraction.
“The services sector continues to slow, with decreases in the business activity and employment indexes,” wrote ISM chair Anthony Nieves.
ISM interviewed several industry representatives, who painted a mixed picture of the economy due to rising wages, higher oil prices, and a looming federal government shutdown in November.
“The general outlook for our organization is less positive than anticipated from the beginning of the year,” an executive from the transportation and warehousing industry told ISM.
A utility industry rep said: “Business conditions have become murky as of late, but still going strong. However, certain business units [need] to be reevaluated.”
According to a manager from wholesale trade, “The UAW strike and potential government shutdown have created risk and caution for our customers who have pulled back on purchases beginning this month.”
These aren’t the only sticking points impacting the services sector.
Service inflation remains stubborn
Unlike other parts of the economy, the services sector has a hard time controlling inflation. Combined with rising wages, they are the biggest factors behind what economists call “sticky inflation.”
Inflation is sticky when the prices of goods and services don’t respond quickly to changes in demand. Think rent, medical services, public transportation, insurance.
According to Akrur Barua, associate vice president at Deloitte, “rising consumer demand” since the pandemic has also contributed to higher prices for services.
The Fed hasn’t been shy in flagging service inflation as a sore spot.
According to the St. Louis Fed, “deflation in certain goods has helped bring average inflation down,” but “inflation in core services remains an item of concern as it has yet to show a marked and sustained deceleration.”
If services inflation remains sticky, there’s a good chance it’ll eat away at consumer spending.
Consumer spending losing steam?
That means fewer dollars in consumers’ pockets to chase goods and services.
Americans with credit card debt and student loan payments are also tightening their belts because of higher interest rates.
“[T]ighter budgets may prompt consumers to cut back on discretionary services spending, especially as services inflation remains sticky,” wrote Claire Li, a senior executive at Moody’s Investors Service.
Other economists share Li’s outlook and believe that consumer spending will end the year on a softer note.
Andrew Hunter, deputy chief U.S. economist at Capital Economics, said it would be “very surprising” if consumer spending grows at the same clip as the third quarter.
“There’s room for higher rates and various other headwinds to start taking a bit more of a toll,” he said.