The ISM services index climbed higher to 66.7 in October from 61.9 in September, reaching a new high. This was much better than market expectations for a more modest increase to 62.0. Despite the decline in the manufacturing reading, the ISM composite reading moved to 66.1 from 61.8 in September.
Demand is booming with two major components setting all-time highs. The business activity sub-index rose by 7.5 points to 69.8 and new orders grew by 6.2 points to 69.7. The new export orders sub-index also moved higher to 62.3 – a 2.8 point increase.
Supply chain issues remain problematic. The supplier deliveries sub-index was 6.9 points higher at 75.7, suggesting that deliveries slowed significantly in October (a higher reading indicates slower deliveries). Meanwhile, the backlog of orders sub-index jumped to 67.3 from 61.9 in September, also setting an all-time high record.
Inventories are down again by 3.9 ppts to 42.2, while inventory sentiment dropped to 37.3 (-9.0 ppts), setting another record – the lowest reading in history.
The employment sub-component slowed for the fourth consecutive month, but remains in expansionary territory with a reading of 51.6 (from 53.0 in September).
The prices paid component expanded to 82.9 in October, just 0.6 points short of the all-time high record in September 2005. All 18 industries reportedly paid higher prices for inputs.
All 18 industries expanded in October.
Key Implications
The ISM services index surprised with another record reading in October. Moreover, two major subcomponents registered all time highs, confirming that consumer demand for services remains robust. Somewhat disappointing is the loss of momentum in the employment sub-index as it indicates that labor supply pressures will continue for the time being.
Other indicators of supply-side challenges moved higher too. Elevated backlogs of orders and longer supplier deliveries at a time when demand continues to accelerate leaves little chance for prices to weaken. Should supply side pressures fail to abate while consumer spending preferences continue to reorient towards services, accelerated price growth may become broader and longer-lasting. We expect that the inflationary pressure will be sustained for some time and the Fed will need to address it by raising the fed funds rate in the summer of 2022
