MNI INTERVIEW: ISM Services Chair Sees Depressed Growth Ahead

Activity in the U.S. service sector stagnated in September and is likely to remain sluggish despite Federal Reserve interest rate cuts, Institute for Supply Management services chair Steve Miller told MNI Friday. 

"There's no impetus so far that I see that says we're going to start expanding again. It's been a very gradual, consistent trend, once you filter out the noise of a specific month or two," Miller said.

The ISM composite decreased 2ppts to 50.0 last month, below market expectations and meeting the neutral threshold of 50 for the first time since January 2010. The business activity index slumped 5.1ppts to 49.9, and employment edged up 0.7pt to 47.2. The U.S. job market contracted for a fourth straight month in September, according to the ISM data. 

Still-high mortgage rates mean little bounce in construction, real estate and rental activity, Miller said. That suggests the service sector growth may not get a boost from expected Fed rate cuts as previously expected, he said. 

SUPPLY AND DEMAND

The ISM new orders index fell from 56.0 to 50.4, returning to where it was in July. "Its not a good trajectory," Miller said. 

"There's nothing indicating strength there. It's all slow growth," he said of new orders. "I would expect we're going to hover around 50 to 50.5, unless there's some big tariff announcement" that could again spur a front-loading of orders. 

While the demand side of the economy is tepid at the moment, the supply side is struggling as well. The supplier deliveries gauge increased to 52.6, the highest reading since February, signaling that firms are seeing more delays. 

Slowness in supplier deliveries is being caused in part by wholesalers' reluctance to bring in additional inventory without a clearer underlying sense of demand, Miller said.

The prices paid ISM measure increased two tenths to 69.4, the fourth straight reading above 69 and the second highest since October 2022. 

"We're talking to supply managers and there isn't any commentary around how retail prices or prices to consumers are sticking. It looks like inflation numbers are still pretty well under control." (See: MNI INTERVIEW: Fed Can Cut Gradually If Jobs Stay Strong- Kohn) 

NO FIRE, NO HIRE

The employment component rose to 47.2 from 46.5, suggesting that the pace of job losses slowed last month.

Still, "even though we're not getting anything that's saying reductions in force or significant downsizing, it looks like there's a high reluctance to add staff," Miller said. 

The employment contraction is driven by tariff policy uncertainty but at the same time ISM survey respondents are holding to an anticipation that something is going to happen that enables services growth to return, he said.