U.S. Services Growth Slows as High Costs Complicate the Fed’s Next Move
October’s ISM services index fell to 54.5, while the prices gauge stayed at 73.0. Slower orders and strained household purchasing power leave a difficult mix for monetary policy.
U.S. service businesses continued to expand in October, but weaker momentum did little to resolve the inflation problem facing the Federal Reserve. The Institute for Supply Management’s services index slipped to 54.5 from 54.9 in September, while its measure of input prices remained elevated at 73.0. The report, released November 4, points to an economy still growing with limited relief from the costs confronting businesses.
The combination matters more than the modest decline in the headline index. A broad collapse in demand would present one set of challenges for policymakers. Continued expansion alongside stubborn cost pressure presents another: easing financial conditions could support spending before inflation is contained, while keeping borrowing costs high could squeeze households whose purchasing power is already under strain.
New orders fell to 55.9 from 59.8, and business activity eased to 53.8 from 56.5. Employment strengthened to 51.4 from 50.1. Supplier deliveries slowed further, with that index rising to 56.7 from 53.2. Those readings describe an uneven expansion rather than a uniform retreat in demand, hiring and supply conditions.
A weaker survey is not a falling price level
The headline remained above the 50 threshold separating expansion from contraction. These are survey indexes, not percentage changes in output. Similarly, a prices reading of 73.0 does not mean that prices rose 73%. It signals the balance of reported changes in input costs. Our guide to the ISM surveys explains how to read these measures without confusing their level with a growth rate.
For businesses, a softer pace of cost increases can still leave a difficult adjustment. A supplier charging more slowly is still charging more. If customers resist further increases in selling prices, the business must absorb some of the difference, find efficiencies or change what it buys. The survey alone cannot establish which response will dominate across companies.
That distinction also applies to households. Lower inflation means prices are rising more slowly; it does not automatically restore earlier purchasing power. Wage growth, taxes, financing costs and the composition of spending all matter. A restaurant bill, insurance renewal or rent payment can remain difficult to afford even after the rate of increase begins to moderate.
Household cash flow offers a second warning
Previously released Bureau of Economic Analysis figures provide a useful check on the survey. In September, disposable personal income increased 0.2% in current dollars but fell 0.3% after inflation. Nominal consumer spending rose 0.5%, while real spending was essentially unchanged. The personal saving rate stood at 3.8%. These are September data, not additional October results.
The gap between nominal and real spending is important for interpreting company revenue. A higher dollar total can reflect more expensive purchases without a comparable increase in the quantity of goods and services consumed. A business reporting sales growth therefore needs a closer look at volumes, pricing and margins before the figure can be treated as evidence of stronger customer demand.
The income figures also help explain why resilient spending can coexist with financial pressure. When purchasing power fails to keep pace with outlays, households have less room to save or must make adjustments elsewhere. That does not establish an imminent downturn, but it can reduce the cushion available if employment income weakens or another essential expense rises.
Our coverage of third-quarter growth and September spending examines that contrast. A strong quarterly aggregate and a softer final month can both be accurate. For the next quarter, the direction of household cash flow may prove more informative than simply carrying forward the previous quarter’s growth rate.
The policy decision still depends on broader evidence
The Fed held its target range at 3.75% to 4.00% on October 28. Its statement described strong economic activity and elevated inflation. Two officials dissented in favor of a quarter-point increase. That decision preceded Wednesday’s services release; the new survey does not represent a fresh Fed announcement or a commitment to any particular December outcome.
The central bank’s dilemma is that spending resilience gives it time to seek clearer evidence on inflation, while slowing real income makes additional restraint more consequential. An input-cost survey cannot settle that tradeoff on its own. Consumer prices, labor income and actual spending will help establish whether businesses can pass costs through and whether customers can continue paying them.
For bond investors, the relevant question is how that evidence changes the expected path of interest rates. Expectations of prolonged inflation can work against the price support that would normally follow weaker growth. Our explanation of duration describes why a bond’s sensitivity to changing yields matters in either direction. Wednesday’s report should be read alongside incoming data, rather than as a standalone signal to buy or sell.
The next test is whether weaker orders are followed by softer activity and whether relief in costs becomes sustained enough to improve real incomes. If those developments occur together, the economy would have a more convincing route toward slower inflation without a sharp contraction. October’s survey leaves that possibility open, but the evidence is still mixed.