- Slower but still solid growth. The Institute for Supply Management’s services index fell 0.4 point to 54.5 in October, the slowest pace of expansion in three months, from about 54.9 in September by our calculation. Readings above 50 indicate expansion.
- Price pressure is sticky. The prices-paid gauge for materials and services fell, but at 73 it was the second-highest reading since mid-2022, after hitting a nearly one-year low in February just before the Iran war sent fuel costs sharply higher. A gauge of supplier delivery times jumped to its highest since April as tariffs and the Middle East conflict strained supply chains.
- Demand is cooling from a high level. New orders slipped to a four-month low but remained well into expansion, and the gauge of order backlogs was the highest since 2022, a sign that service firms have full order books. Fifteen industries reported growth, including transportation and warehousing, information and entertainment, while construction and healthcare contracted.
- Hiring is picking up. Service providers have been cautious on hiring as they balance robust demand with rising costs, but ISM’s employment gauge advanced to 51.4, the highest since February.
What Happened?
Resilient consumer spending, a stable job market and strong business investment have supported demand for services throughout the year, but firms are coping with mounting costs and delivery delays. “Tariffs and fuel cost impacts continued to be the most-cited issues impacting respondents’ supply chains,” said Steve Miller, chair of ISM’s Services Business Survey Committee, adding that many respondents are not yet seeing the full impact of these costs or have not passed them through to customers. One information-sector respondent said fuel prices had reduced margins because the company had not passed the expense on, while a retail respondent said “tariffs are causing havoc with international merchandise sourcing.”
Why It Matters?
The details matter more than the headline for the Fed. Miller warned that “more pricing pressure is on the way if oil and tariff cost impacts are not mitigated,” and a prices gauge near its highest since mid-2022 alongside backlogs at their highest since 2022 suggests firms have room to raise prices. A rising employment index adds to signs that the labor market is stabilizing, which together strengthens the case for the Fed to keep tightening rather than ease. For bonds, that is a headwind to the post-election rally in Treasuries, and for equities it points to margin pressure in consumer-facing service businesses that have so far absorbed higher costs.
What’s Next?
Investors will watch whether service firms start passing through fuel and tariff costs in the coming months, which would show up in consumer inflation data. The path of oil prices and any easing of the Iran conflict are key swing factors for the prices gauge. The upcoming official October jobs report will test whether the improvement in ISM’s employment gauge is broad-based, and the Fed’s next moves will hinge on whether cost pressures keep building.
Affected Tickers and Coins: SPY, XLY, IYT, TLT
Source: Bloomberg
