On Thursday, October 3rd, data released by the Institute for Supply Management (ISM) showed that the U.S. ISM Services PMI for September was 54.9, significantly better than expected and a noticeable increase from August. This marks the third consecutive month of expansion and the fastest expansion rate since February 2023, driven by a surge in orders and stronger business activity.

The U.S. ISM Services Index for September was 54.9, versus an expected 51.7 and the previous August reading of 51.5. A reading of 50 is the threshold between expansion and contraction. The September ISM Services PMI exceeded the expectations of all economists surveyed by the media.

Since the second quarter of this year, the U.S. Services PMI has shown significant fluctuations. Both the April and June ISM Services PMIs fell into contraction; in May, the expansion rate was the largest in nine months, thanks to a significant increase in the business activity indicator; the July data also exceeded expectations and recorded expansion, with the employment index returning to the expansion range.

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Regarding key sub-indices for September:

- The new orders index jumped by 6.4 points, the largest monthly increase since the beginning of 2023, reaching 59.4.

- The business activity index surged by 6.6 points in a month, reaching 59.9, setting a four-month high. This indicator corresponds to the factory output sub-index in the ISM manufacturing data. These figures indicate that the U.S. economy performed robustly at the end of the third quarter.

- The pickup in demand growth also drove an acceleration in the rise of material and service prices. The cost of payments index rose from 57.3 in August to 59.4 in September, the highest level since January of this year.

- There are more signs that businesses are reducing hiring. The employment index fell from 50.2 to 48.1, falling into contraction, indicating that businesses feel confident that the number of existing employees can meet demand.

- The growth in inventories and imports accelerated in September, which may reflect businesses' efforts to build up inventories before the strike by dockworkers on the East Coast and along the Gulf Coast. Retailers are also stockpiling goods before the holiday shopping season.

Analysis points out that the ISM Services PMI survey contrasts sharply with the organization's manufacturing PMI data. Data released earlier this week showed that the ISM Manufacturing PMI has been in contraction for the sixth consecutive month. The services index is 7.7 points higher than the manufacturing index, the largest gap since the end of 2019, highlighting the divergence in the U.S. economy.

Zerohedge noted that in 2015 and 2019, downturns in manufacturing were followed by more severe downturns in services, with the manufacturing downturn occurring several months earlier.Earlier on the same day, data released by Markit showed:

The final value of the US Markit Services PMI for September was 55.2, close to the highest level since March 2022, with an expectation of 55.4 and an initial value of 55.4.

The final value of the US Markit Composite PMI for September was 54, with an expectation of 54.4 and an initial value of 54.4.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said:

The US economic recovery is becoming increasingly unbalanced, with manufacturing falling further into recession in September, leaving economic growth entirely dependent on the service sector. The sluggishness of factories shows some signs of spreading to the service sector, particularly suppressing the growth of industrial services.

US service sector companies reported a strong finish to the third quarter, with output continuing to grow at the fastest pace in the past two and a half years. Following the GDP growth of 3.0% in the second quarter, a similarly strong performance may also be seen in the three months ending in September.

Encouragingly, the growth rate of new business inflows in the service sector was only slightly below the 27-month high in August. Survey participants have reported that lower interest rates have boosted demand, especially for financial services, along with healthcare, which are particularly strong-performing industries.

However, businesses' concerns about the future are deepening, with business confidence declining in September due to the uncertainty brought by the upcoming presidential election and the increasing recognition of the rising risk of economic recession.

Therefore, how the presidential election will affect economic growth, and to what extent rate cuts will help revitalize struggling industries such as industrial goods and services, remains to be seen. Clearly, there are both upside and downside risks to economic growth.

Inflation signals in the survey indicate that price pressures are recovering, mainly related to the persistently high wage growth, which may dampen the Federal Reserve's enthusiasm for further significant rate cuts.