WASHINGTON (Reuters) - U.S. services sector activity jumped to a 1-1/2-year high in September amid strong growth in new orders, more evidence that the economy remained on a solid footing in the third quarter.
The Institute for Supply Management (ISM) said on Thursday that its nonmanufacturing purchasing managers (PMI) index accelerated to 54.9 last month, the highest level since February 2023, from 51.5 in August.
A PMI reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of the economy. The ISM views PMI readings above 49 over time as generally indicating an expansion of the overall economy. Economists polled by Reuters had forecast the services PMI rising to 51.7.
The survey joined fairly upbeat August data on consumer spending and a smaller goods trade deficit in suggesting that the economy retained much of its momentum from the second quarter.
The Atlanta Federal Reserve is estimating that gross domestic product increased at a 2.5% annualized rate in the July-September quarter. The economy grew at a 3.0% pace in the second quarter. The government's annual benchmark revisions published last week showed a stronger economic performance in the past three years than previously reported.
The ISM survey's new orders measure surged to 59.4, also the highest level since February 2023, from 53.0 in August.
With demand rising, businesses faced higher prices for inputs. This probably does not change the slow inflation trajectory as goods prices continue declining. The annual increase in inflation was the smallest in 3-1/2 years in August.
The ISM's prices paid measure for services inputs increased to an eight-month high of 59.4 from 57.3 in August. Its measure of services employment dropped to 48.1 from 50.2 in August, consistent with a slowdown in the labor market.
Much of the moderation in job growth is from cooling demand after hefty interest rate hikes in 2022 and 2023, but there are some pockets of worker shortages, especially in the leisure and hospitality sector where job openings rose 80,000 in August, while hires fell.
A steady pace of job growth is expected for September. A Reuters survey forecast nonfarm payrolls increasing by 140,000 jobs last month after rising 142,000 in August. Job gains averaged 202,000 per month over the past year.
The unemployment rate is forecast to be unchanged at 4.2%. It has increased from 3.4% in April 2023.
The Federal Reserve last month cut its benchmark interest rate by an unusually large 50 basis points to the 4.75%-5.00% range, the first reduction in borrowing costs since 2020, acknowledging the growing risks to the labor market.
The U.S. central bank is expected to cut rates again in November and December.