Following a large gain in August, the Institute for Supply Management’s (ISM) non-manufacturing index came in strong again in September, rising by 3.1 points to 61.5 – an all-time high. The print surprised on the upside, with markets expecting the index to moderate to 58.0.

Looking beneath the headline, the details of the report were also bright, with all of the index’s ten subcomponents rising or remaining unchanged on the month. Similarly, all seventeen industries covered by the survey reported growth in September.

The largest gain was seen in employment subcomponent, which surged by 5.7 to 62.4. Business activity has also picked up significantly, rising by 4.5 points to 65.2. Gains were more moderate elsewhere: new orders rose by 1.2 points to 61.6 indicating stronger demand, price pressures also intensified in tandem, with prices paid subcomponent rising by 1.4 points to 64.2.

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There was also a rise in backlog new orders and supplier delivery times, indicating that firms were having more difficulty meeting demand.

Trade-related subcomponents improved. New export orders edged higher (+0.5 to 61.0), while imports picked up (+3.0 to 55.0).

Survey respondents expressed high levels of optimism about the domestic economy and demand, but continued to indicate capacity constraints due to shortage of labor, higher prices and logistical difficulties. Worries about tariffs continued to show up, particularly in retail trade, while respondents from the construction industry stated that higher prices on materials were having a negative impact on earnings.

Key Implications

In a rare divergence from its manufacturing counterpart, the ISM non-manufacturing index continued to move higher in September. Broad-based expansion across the entire swath of non-manufacturing industries alongside positive comments from survey respondents suggest that the U.S. services sector remains healthy.

While, non-manufacturing industries are less exposed to international trade than their manufacturing counterparts, they are not immune to tariffs, as evidenced by concerns in retail and construction industries. While the newly minted USMCA deal with Canada and Mexico signed this week has helped to dissuade some trade-related fears, the battle with China looks likely to escalate further in the coming months. This could lead to further increases in input costs, possible disruptions in supply chains and lower business sentiment and output.

Summing it up, strong domestic demand will continue to provide a solid base for service-sector industries. That being said, non-manufacturing firms are increasingly facing capacity constraints, such as labor shortages and rising input prices.

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