Activity in the US services sector is inching toward contraction.
The S&P Global Flash US Services Business Activity Index dipped to a reading of 50.2 in September, according to new data released Friday. That's an eight-month low and down from 50.5 in August. Economists surveyed by Bloomberg had expected the services sector to rebound to a reading of 50.7 in September.
The composite PMI came in at 50.1, a seven-month low and down from 50.2 in August, driven by declines in the services sector. Any reading above 50 for these indexes represents expansion in the sector; readings below 50 indicate contraction.
"PMI data for September added to concerns regarding the trajectory of demand conditions in the US economy following interest rate hikes and elevated inflation," S&P Global Market Intelligence principal economist Sian Jones said. "Although the overall Output Index remained above the 50.0 mark, it was only fractionally so, with a broad stagnation in total activity signaled for the second month running. The service sector lost further momentum, with the contraction in new orders gaining speed."
While manufacturing has continued to recover, the services sector has dragged on overall output since hitting 13-month highs in May. S&P Global noted that new orders are falling at a faster pace for services than manufacturing. Companies told S&P Global that high interest rates and inflationary pressures weighed on client demand. Higher oil prices and larger wage bills also drove operating expenses up, the companies said. With less demand, new businesses in the services sector grew at their slowest pace since December 2022.
Broadly, business confidence across the private sector hit a nine-month low in September. Strikes were one of the reasons, among inflation and higher rates, that businesses cited as concerns.
Despite the overall resilience of the US consumer, economists have been wary of a slowdown still coming in the near future. Some have highlighted the impact of the United Auto Workers strike, combined with the restart of student loan payments and the potential lagging impacts of monetary policy, as something that could weigh on the consumer in the back half of 2023 and into 2024.
Despite the slowdown in activity, S&P Global's report showed resilience in the labor market. The rate of job creation hit its fastest level since May as companies highlighted job openings were being filled with greater ease. The report cited anecdotal evidence that businesses are having an easier time finding suitable candidates for roles.
This comes in line with trends seen in the Bureau of Labor Statistics' monthly reports. In August, the US economy added 187,000 jobs, up from 157,000 in July. Meanwhile, unemployment rose to 3.8% from 3.5% the month prior. More Americans joining the workforce drove the increase in the unemployment rate as labor force participation hit its highest levels since February 2020.
"Subdued demand did not translate into overall job losses in September as a greater ability to find and retain employees led to a quicker rise in employment growth," S&P Global's Jones said in Friday's release. "That said, the boost to hiring from rising candidate availability may not be sustained amid evidence of burgeoning spare capacity and dwindling backlogs which have previously supported workloads."
Josh Schafer is a reporter for Yahoo Finance.
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