U.S. services gauge falls to lowest since May 2020 as orders cool

U.S. service providers expanded in October at the slowest pace since May 2020 as orders growth and business activity moderated, suggesting the broader economy continues to cool.

The Institute for Supply Management’s gauge of services retreated to 54.4 last month from 56.7 in September, according to data released Thursday. The median projection in a Bloomberg survey of economists was 55.3. Readings above 50 signal growth.

The group’s measure of business activity, which parallels the ISM’s factory output gauge, declined to a five-month low, and the new orders index fell to the lowest level since June.

In contrast to the purchasing managers group’s survey of manufacturers, the prices-paid index increased and remains elevated.

The report suggests demand for services is easing amid high inflation, rising interest rates and an uncertain economic outlook. While the Federal Reserve boosted interest rates on Wednesday by another 75 basis points to alleviate price pressures, its campaign to tighten policy runs the risk of sending the economy into a recession.

The ISM’s index of services employment retreated from a six-month high, dropping below the breakeven reading of 50 in October. The figure suggests some industries continue to have trouble hiring, while others are cutting payrolls outright.

“There are still challenges in hiring qualified workers, and due to uncertainty regarding economic conditions, some companies are holding off on backfilling open positions,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement.

Sixteen services industries reported overall growth last month, led by mining, agriculture, entertainment and recreation, and transportation and warehousing.

Meantime, delivery times at service providers slowed in a sign that supply chains are not yet back to normal. Services did, however, make a bit more headway on order backlogs as the ISM gauge eased slightly to a five-month low.

Inventory levels continued to shrink in October, though less than in the prior month. A measure of exports contracted by the most since the start of the year, marking a large swing from a month earlier when they surged.