The American services sector grew less than expected in October, at its weakest level since May 2020, as new orders eased and businesses struggled to replenish their stocks, an industry survey said Thursday.
Growth in the key sector, which accounts for two-thirds of the world’s largest economy, has held up since the height of the pandemic but analysts caution that high inflation and weaker demand could stall its momentum.
The Institute for Supply Management’s services index dipped to 54.4 percent last month, down from September but still firmly above the 50-percent threshold indicating growth.
“Supplier deliveries continued to slow, at a faster rate in October… growth rates and business levels have cooled,” said ISM survey chair Anthony Nieves in a statement.
The latest reading is the lowest since May 2020, when the figure stood at 45.2 percent, he added.
This comes as the business activity index dropped 3.4 percentage points from September, while new orders moderated as well, the survey found.
Even though supply chains showed signs of improvement, respondents face challenges hiring qualified workers and some companies are holding off on filling open positions due to economic uncertainty, Nieves added.
One respondent in the construction industry said customers are starting to delay projects or enter smaller-scale scopes of work, underscoring the jitters.
Another, in the agriculture sector, expressed concern that sales volumes were trending down with buyers planning to “to buy only what they need for immediate sales.”
While there has been a recent surge in inflation, the sector has expanded for all but two of 153 months, excluding a two-month contraction in April and May 2020 when the US grappled with the start of the coronavirus outbreak.
But with inflation remaining stubbornly high, the Federal Reserve has been raising interest rates to cool the economy.
Analysts expect that activity will likely slow further as demand eases on ongoing interest rate hikes.
“A confluence of challenges will make it hard for services to sustain positive momentum in 2023 as the economy falls into a mild recession,” said Oren Klachkin of Oxford Economics.
“Weakening demand, elevated inflation… falling earnings, and downbeat sentiment will spark a downturn in services,” he added.