Economic activity in the U.S. services sector continued to expand in September, as the Services PMI reached 54.9%, its highest level since February 2023, marking a robust recovery.

According to the Services ISM Report On Business released on Thursday, this increase of 3.4 percentage points from August’s 51.5% reflects strong growth in business activity and new orders.

The report raises concerns about how it may influence upcoming Federal Reserve rate cuts. With the services sector expanding for 49 of the last 52 months, the data suggests resilient demand, which could influence the Fed’s decision on the size of the anticipated November cut.

According to the CME FedWatch tool, traders now see a 65.6% probability of a 25-basis point rate cut in November, with a 34.4% chance of a 50-basis point cut.

Also on Thursday, the S&P Global US Services PMI Business Activity Index posted 55.2 in September. That’s slightly down from 55.7 in August. This marked the 20th consecutive month of expansion in services activity. New orders continued to rise solidly, although input prices increased at the joint-fastest pace in a year, driven by salary pressures and higher costs for manufactured goods.

Employment dropped for the second month, but companies remained cautious about hiring due to strong cost pressures. Business confidence declined sharply to its lowest level since October 2022 as concerns about an economic slowdown grew.

September ISM Services PMI Report: Key Highlights

• The Services PMI rose to 54.9% in September, the highest reading since February 2023.
• Business activity expanded significantly, with the Business Activity Index climbing to 59.9%.
• The New Orders Index increased to 59.4%, up from 53% in August.
• The Employment Index contracted to 48.1%, down from 50.2% in August.
• The Supplier Deliveries Index returned to expansion, hitting 52.1%.
• Panelists expressed concerns over political uncertainty and labor costs, despite positive supply chain improvements.

Experts React To September Data

Steve Miller, chair of the ISM Services Business Survey Committee, highlighted the continued expansion in services. “Twelve industries reported growth in September, up two from the 10 industries reporting growth in August,” he said.

“The Supplier Deliveries Index returned to expansion in September, indicating slower delivery performance,” Miller added. “The stronger growth indicated by the index data was generally supported by panelists’ comments; however, concerns over political uncertainty are more prevalent than last month”

Chris Williamson, chief business economist at S&P Global Market Intelligence, said, “U.S. service sector businesses reported a strong end to the third quarter, with output continuing to grow at one of the fastest rates seen over the past two-and-a-half years.”

Still, he also noted that “companies have become increasingly concerned about the outlook… with business confidence slumping in September amid uncertainty caused by the upcoming election as well as perceptions of rising recession risks.”

Market Reactions

Markets were trading lower on Thursday following the data release.

The S&P 500, tracked by the SPDR S&P 500 ETF Trust SPY, was trading 0.5% lower.

The U.S. dollar index (DXY), tracked by the Invesco DB USD Index Bullish Fund ETF UUP, was up 0.31%

Other major asset movements following the ISM Services PMI print included:

• The Nasdaq 100, as monitored through the Invesco QQQ Trust QQQ, was down 0.3%.
• The iShares 20+ Year Treasury Bond ETF TLT, tracking long-dated Treasuries, was down 0.63%.
• Gold, as tracked by the SPDR Gold Trust GLD, was down 0.3%.

Image created using artificial intelligence via Midjourney.