Implications: Service sector activity continued to expand at a solid pace in September, with the ISM Services index coming in at 54.9, just slightly below both last month’s reading and consensus expectations. Service activity continues to show resilience in the face of multiple headwinds this year. Despite the prices index reaching a four-year high in September, the overall services index has registered above 53.0 for ten consecutive months, the longest stretch since 2022. Looking at the details, overall growth was broad in September with thirteen of the major service industries reporting expansion, while four reported contraction, and one reported no change. The major measures of activity were mixed in September.  Both business activity and new orders fell from their multi-year highs in August: the business activity index fell to 56.5 from 61.7, and the new orders index declined to 59.8 from 60.9.  Both forward-looking indices have shown expansion in each of the last sixteen months.  As a result, order backlogs have started to stack up. The backlog of orders index rose to 56.6 in September, the highest in over four years, and the eighth consecutive month in expansion. Survey comments reveal a hesitant outlook surrounding both elevated prices and a higher interest rate environment. However, some report that it has not been enough to dampen growth. One comment from the Wholesale Trade industry notes that “Demand remains very strong. Manufacturers have very little breathing room to keep up with demand, and in some cases, typical lead times have slipped.”  This mounting pressure has caused service companies to add to payrolls in September, with the employment index rising back into expansion territory at 50.1. While one month does not make a trend, it is a welcome sign in an industry that has struggled to consistently hire for the past three years. Unfortunately, the highest reading of any index was once again the prices index, which rose to 74.0 in September, now the sixth time this year the index has breached 70.0. Though the index remains elevated, it remains below the worst we saw during the COVID when M2 surged by 42% and the prices paid index reached the low 80s.

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