US services activity hits 8-month high; employment remains weak

U.S. services sector activity increased to an eight-month high in October as new orders grew solidly, but subdued employment pointed to lackluster labor market conditions against the backdrop of economic uncertainty stemming from tariffs.

Comments from businesses in the Institute for Supply Management survey released on Wednesday were mixed. Some viewed activity as flat while the import duties and the ongoing shutdown of the federal government were headaches for others. But some companies struck an optimistic note, reporting business was solid or picking up.

At face value, the survey would suggest steady to strong economic activity at the start of the fourth quarter. But the longest U.S. government shutdown in history has caused a blackout of official data, obscuring the economic outlook.

“The survey is more evidence of a disconnect between positive economic growth and meager job growth,” said Bill Adams, chief economist at Comerica Bank.

The ISM said its nonmanufacturing purchasing managers index rose to 52.4 last month, the highest reading since February, from 50.0 in September. Economists polled by Reuters had forecast the services PMI would climb to 50.8. The services sector accounts for more than two-thirds of U.S. economic activity.

The PMI is well above the 48.6 level that the ISM says indicates an expansion of the overall economy.

The nonpartisan Congressional Budget Office estimated the government shutdown, now in its 36th day, could slice between 1.0 and 2.0 percentage points off gross domestic product in the fourth quarter. The CBO estimated most of the decline in GDP eventually would be recovered, but projected between $7 billion and $14 billion would not be.

The third-quarter GDP report was due last month. The economy grew at a 3.8% annualized rate in the second quarter.

Eleven industries including retail trade, utilities, transportation and warehousing as well as professional, scientific and technical services reported growth in October. Among the six reporting contraction were finance and insurance, public administration and construction.

Some finance and insurance providers viewed activity as “generally” flat and said they were “closely monitoring effects of the new tariff announcement.” Import duties were described as continuing to “cause disruption in contracts and contracting, driving up pricing on goods” by some utilities firms.

But some retailers reported business was “very strong” with “no supply chain or logistical issues.” Transportation and warehousing companies said “general business has been steady, with minimum fluctuation.”

The ISM survey’s measure of new orders received by services businesses increased to 56.2 last month from 50.4 in September. But backlog orders plunged while exports remained depressed.

Weak export orders mirrored the findings in the ISM manufacturing survey on Monday, which noted “ongoing trade friction.” President Donald Trump’s sweeping tariffs have caused tensions with trade partners, including China and Canada.

The U.S. Supreme Court on Wednesday heard arguments on the legality of Trump’s import duties. Trump has defended the tariffs as necessary to protect domestic manufacturing.

Prices paid by services businesses for inputs also picked up last month. The survey’s measure of prices paid by businesses inched up to 70.0 from 69.4 in September.

Economists said the elevated reading supported the Federal Reserve’s caution about cutting interest rates again next month, especially given the dearth of data. The U.S. central bank lowered its benchmark overnight interest rate by 25 basis points to the 3.75%-4.00% range last month.