U.S. Service Sector Reaches Two-Year High Amid Election Climate
In October, the U.S. services sector demonstrated stronger activity as a critical component of the economy, reaching a peak not seen in over two years. The Institute for Supply Management (ISM) reported that the non-manufacturing Purchasing Managers' Index (PMI) rose to 56.0 in October, up from 54.9 the previous month, marking the highest level since August 2022. This increase exceeded economists' expectations, which projected a decline to 53.8.
A PMI above 50 indicates expansion, and the service sector, which constitutes a significant portion of the U.S. economy, continued to grow. ISM considers sustained PMI readings above 49 as a sign of overall economic expansion.
This positive economic indicator comes as Americans head to the polls to choose between Democratic Vice President Kamala Harris and former Republican President Donald Trump for the presidency. It is anticipated that the election outcome will be influenced by voter perceptions regarding a complex economic landscape characterized by high prices straining households, inflation nearing normal levels, low unemployment, and the Federal Reserve's interest rate reductions to maintain economic health.
Following a half-point cut in September, the Federal Reserve is expected to lower its policy rate by a quarter-point to a range of 4.50% to 4.75% on Thursday. Despite this expected cut, the central bank indicated a cautious approach against further substantial rate reductions, driven by strong economic data, including a 2.8% annual increase in gross domestic product and robust consumer spending in the third quarter.
The ISM survey indicated a slight decline in new orders for October, with the measure falling from 59.4 in September to 57.4. Additionally, the price index for service inputs decreased slightly to 58.1 from the eight-month high of 59.4 seen the previous month.
Notably, the ISM's service employment measure rose significantly in October to 53.0, up from 48.1 in September, suggesting an increase in job growth in the sector. This contrasts with the report released by the Labor Department last Friday, which indicated a marked slowdown in hiring, with only 12,000 jobs added in the last month. It is believed that the Labor Department's findings may have exaggerated labor market weaknesses due to external factors such as the Boeing (NYSE:BA) strike and the impact of hurricanes.
Concerns have grown as the unemployment rate remained steady at 4.1%, with more individuals exiting the workforce and the three-month average monthly job increase declining to 104,000, below the rate needed to keep pace with population growth.