ISM reports October Service PMI gains

Following flat October output, services sector output saw growth in October, to begin the fourth quarter, according to the new edition of the Services ISM Report on Business, which was released this week by the Institute for Supply Management (ISM).

The October Services PMI, at 52.4 (a reading over 50.0 or above represents expansion and below 50 indicates contraction), increased 2.4% over September’s 50.0 reading, which was preceded by expansion in 13 of the previous 14 months before September. The October reading is 0.7% above the 12-month average of 51.7, with December 2024 and May 2025 representing the respective high and low readings over that period, at 54.0 and 49.9, respectively.

ISM reported that 11 of the services sectors it tracks saw growth in October, including: Accommodation & Food Services; Retail Trade; Wholesale Trade; Real Estate, Rental & Leasing; Health Care & Social Assistance; Utilities; Transportation & Warehousing; Agriculture, Forestry, Fishing & Hunting; Information; Professional, Scientific & Technical Services; and Educational Services. Sectors seeing contraction included: Arts, Entertainment & Recreation; Management of Companies & Support Services; Finance & Insurance; Public Administration; Construction; and Other Services.

The report’s subindexes that factor into the PMI largely saw sequential gains, including:

• Business Activity/Production, at 54.3, up 4.4%, following a 5.1% September contraction (its first since May 2020, and topping the 54-mark for the sixth time in 2025, with 10 sectors seeing an increase in business activity;
• New Orders, at 56.2, up 5.8, after a 5.6% September decline, growing, at a faster rate, for the fifth consecutive month (and expanding in 32 of the last 34 months, with 12 sectors reporting growth
• Employment, at 48.2, up 1.0%, contracting, at a slower rate, for the fifth consecutive month, with six sectors reporting growth, for its highest reading since May’s 50.7, with four sectors reporting an increase in employment; and
• Supplier Deliveries, at 50.8 (a reading above 50 indicates slower deliveries), off 1.8% from September and slowing, at a slower rate, for the 11^th consecutive month, with six sectors reporting slower deliveries

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

“Uncertainty due to the federal government shutdown has shuttered many non-essential functions,” said a Management of Companies & Support Services panelist. “This will lead to project delays and likely hurt our overall fiscal year 2026 expectations. Our sites are funded through the next couple of months, but if the shutdown continues beyond that time, we will expect mass furloughs of our employees.”

A Utilities panelist said that tariffs continue to cause disruption in contracts and contracting, driving up prices on goods, particularly engineered and manufacturing equipment.

“October’s Services PMI is a continuation of a downward trend of more than 10 percentage points in the 12-month average since February 2022, when it was 62.6 percent,” wrote Steve Miller, Chair of the ISM Services Business Survey Committee, in the report. “The rebounds in both the Business Activity and New Orders indexes in October are positive signs, while the continued contraction in the Employment index shows a lack of confidence in the continued strength of the economy. The Backlog of Orders Index continued its 3½ year declining trend; even with a contracting Employment Index, companies can more than keep up with new orders to reduce backlogs. Respondents continued to mention the impact of tariffs on prices paid. There was no indication of widespread layoffs or reductions in force, but the federal government shutdown was mentioned several times as impacting business activity and generating concerns for future layoffs. In the Health Care & Social Assistance and Retail Trade industries, panelists noted seasonal strength in activity, and comments from many industries mentioned continuing demand stability.”

Miller said in a recent interview 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 point 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.