ISM reports slower US services growth as inflation persists

The Institute for Supply Management's services purchasing managers index fell to 54.5 in October from 54.9 in September, below the 54.8 economists surveyed by The Wall Street Journal expected.^[1] The survey tracks conditions at service businesses; a reading above 50 signals expansion, so the result indicates slower growth.^[1]

Services make up the largest part of the US economy. Related coverage describes continued growth ahead of the holiday shopping season, alongside business leaders' concerns about stubborn inflation.^[2]

Continued expansion supports service businesses' revenue, while inflation raises operating costs. How much of that demand becomes profit depends on whether firms can pass costs through to customers; the coverage does not provide enough detail to measure the change in margins.^[1][2]

A resilient economy with persistent price pressure may also give the Fed more reason to keep rates high enough to restrain borrowing and spending, delaying cheaper financing for businesses. Gold coverage identifies that policy risk as a headwind while reporting that the metal held above $4,000 an ounce; because gold pays no interest, higher bond yields increase the income investors forgo by holding it.^[3]

Treasury yields nevertheless fell in the latest session: on November 4, the two-year yield was 4.58%, down 0.03 percentage point from the prior session, and the ten-year was 4.90%, down 0.05 percentage point. These levels describe the rate backdrop; they do not establish that this survey pushed borrowing costs higher.

Impact

What to watch next

• The November 6 October jobs report will test economic resilience and wage pressure. Forecasts call for 65,000 additional nonfarm jobs and 0.3% monthly wage growth; stronger results could reinforce the case for keeping rates elevated.
• The November 10 October consumer price index will test whether inflation is easing. Core CPI, which excludes food and energy, is forecast to rise 0.2% monthly after 0.3%; that slowdown would weaken the case that persistent inflation limits rate cuts.