U.S. Services Sector Activity Surges in October

WASHINGTON (Reuters) – U.S. services sector activity unexpectedly accelerated in October to a more-than two-year high, and employment strengthened, providing further evidence that the economy is in solid shape as the nation approaches the presidential election.

The Institute for Supply Management (ISM) reported on Tuesday that its non-manufacturing purchasing managers (PMI) index rose to 56.0 in October from 54.9 in September, the highest level since August 2022.

Economists polled by Reuters had predicted the services PMI to decline to 53.8.

A PMI reading above 50 signifies growth in the services sector, which accounts for over two-thirds of the economy. The ISM considers PMI readings above 49 as generally indicating economic expansion.

This report coincides with Americans preparing to vote between Democratic Vice President Kamala Harris and Republican former president Donald Trump for the next presidency.

Polls suggest that the closely contested race may hinge on voters' perceptions of the economy, where high prices persist as a pain point for families despite inflation nearing normal levels, low unemployment, and the Federal Reserve reducing interest rates to stabilize the situation.

On Thursday, the Fed is expected to lower the policy rate by a quarter of a percentage point to the 4.50%-4.75% range. It previously cut the rate by half a percentage point in September. However, positive economic data, including a 2.8% annualized increase in third-quarter gross domestic product and robust consumer spending, have put the likelihood of further significant reductions on hold.

The ISM survey indicated that new orders eased to 57.4 in October from 59.4 in September. The ISM's prices paid measure for service inputs decreased to 58.1 from September's eight-month high of 59.4.

ISM's services employment measure increased to 53.0 in October, up from 48.1 in September, signaling strengthening job growth.

This increase appears inconsistent with last Friday's Labor Department report that employers sharply slowed hiring, adding just 12,000 jobs last month. That report was seen as overstating job market weakness, affected by a Boeing (NYSE:BA) strike that impacted manufacturing jobs and hurricanes that forced over half a million workers out of jobs.

However, the report also provided evidence that labor conditions have cooled, with a three-month average monthly job gain now at 104,000, below the amount needed to keep pace with population growth. While the unemployment rate remained steady at 4.1%, this was largely due to more people leaving the labor force.