US service sector slows modestly in September -ISM survey

WASHINGTON (Reuters) – The U.S. services sector slowed in September as new orders fell to a nine-month low, but the pace remained consistent with expectations for solid economic growth in the third quarter.

The Institute for Supply Management (ISM) said on Wednesday that its non-manufacturing PMI slipped to 53.6 last month from 54.5 in August. A reading above 50 indicates growth in the services industry, which accounts for more than two-thirds of the economy. It was in line with economists’ expectations.

Demand for services is being underpinned by a shift in spending away from goods amid higher interest rates. The ISM reported on Monday that its manufacturing PMI contracted in September for the 11th straight month, though the pace of decline slowed considerably.

Growth estimates for the third quarter are as high as a 4.9% annualized rate. The economy grew at a 2.1% pace in the April-June quarter.

A measure of new orders received by services businesses dropped to 51.8 last month, the lowest level since December, from 57.5 in August. But order backlogs improved and exports pushed higher. Despite the slowdown in new orders, services inflation remained elevated.

The services sector is at the center of the Fed’s battle to bring inflation down to its 2% target. Services prices tend to be stickier and less responsive to rate hikes.

A gauge of prices paid by services businesses for inputs was unchanged at 58.9. Some economists view the ISM services prices paid measure as a good predictor of personal consumption expenditures (PCE) inflation. The Fed tracks the PCE price indexes for monetary policy. The annual increase in the PCE price index excluding food and energy fell below 4% in August for the first time in more than two years.

A measure of services sector employment fell to 53.4 from 54.7 in August.

(Reporting By Lucia Mutikani; Editing by Andrea Ricci)