September ISM Services PMI holds on to growth

Services sector output was flat in September, while remaining on the right side of growth, following expansion in 13 of the past 14 months, according to the new edition of the Services ISM Report on Business, which was released today by the Institute for Supply Management (ISM).

The September Services PMI, at 50.0 (a reading of 50.0 or above represents expansion and below indicates contraction) was below August’s 52.0, which topped July by 1.9%. This reading is 2.0 below the 12-month high of 52.0 set in August and 0.1% above the May 2025 low of 49.9.

ISM reported that 10 of the services sectors it tracks saw growth in September, including: Accommodation & Food Services; Health Care & Social Assistance; Other Services; Information; Public Administration; Educational Services; Wholesale Trade; Finance & Insurance; Transportation & Warehousing; and Utilities. Services sectors seeing contraction included: Mining; Agriculture, Forestry, Fishing & Hunting; Construction; Management of Companies & Support Services; Professional, Scientific & Technical Services; Retail Trade; and Real Estate, Rental & Leasing.

The report’s subindexes that factor into the NMI were largely down from August, including:

• Business Activity/Production, at 49.9, down 5.1%, contracting for the first time since May 2020, with eight sectors seeing an increase in business activity;
• New Orders, at 50.4, down 5.6%, growing, at a slower rate, for the fourth consecutive month, with no sectors reporting growth;
• Employment, at 47.2, up 0.2%, contracting, at a slower rate, for the fourth consecutive month, with six sectors reporting growth; and
• Supplier Deliveries, at 52.6 (a reading above 50 indicates slower deliveries), up 2.3%, slowing, at a faster rate, for the 10^th consecutive month, with nine sectors reporting slower deliveries

Comments from ISM member panelists included in the report highlighted various trends in the services sector, with tariffs again receiving a fair amount of attention.

“We are beginning to see the impact of the tariffs impact our business, particularly for food products from India, China, and Southeast Asia, coffee from South America, and apparel and electronics from Asia,” said an Accommodation & Food Services panelist. “Our year-over-year cost increases are getting progressively greater.”

In an interview, Steve Miller, Chair of the ISM Services Business Survey Committee, said that September was indicative of the curve that the services sector has been on for the last three years.

“We saw we saw some blips in June and August, and for both of those months, we saw upticks in inventory,” he said. “I think it's very reasonable to conclude the increase in activity was really getting ahead of tariff impacts and bringing additional inventory in. The overall trajectory for business activity and new orders hasn't changed. It's been a three-year slight decline in growth.”

When asked about the decline in new orders, Miller said it helps to look at the new export orders number, which was off 0.8%, to 46.5, in September, and been below 50 in six of the last seven months.

“Having new orders still be in expansion while new export orders contracted faster may be a positive sign around the resiliency of the domestic market,” he said. “And maybe some of that, move to domestic may be impacting it overall. The other side of the coin, though, is it's pretty clear that the new orders number last month [August] looks like it was getting ahead of getting out of tariff impacts with new contracts, and getting a little bit more inventory in. And then this month, we saw inventory drop, but inventory sentiment is worse, in terms of saying we have too much inventory. So those together says that the new order activity that we're seeing is not enough to make us happy about the level of inventory we have, even though it's reduced from last month.”

As for what the fourth quarter may bring, Miller said that in looking at some economic indicators and Federal Reserve commentary indicating the Fed is concerned over inflation and also weak employment numbers, the two together points to some easing but not shocks.

Looking at the Fed’s recent 0.25% rate cut, Miller said it did not drive much in the way of improved economic activity overall.

“The comments that we got in ISM’s Semiannual Forecast largely stated that we were going to be flat for the rest of the year,” he said. “And the average since the data was gathered from the report in May was an average of 50.6 for the Services PMI. I don’t see anything with that changing, unless we see a 0.50% or 0.75% rate cut—which I don’t think we will be based on commentary and what we are seeing in our numbers and prices paid index [up 0.2%, to 69.4, in September].”