U.S. service sector slows in October; price pressures build up - ISM survey

Customers drink and dine inside the restaurant "Martha" after showing proof of their coronavirus disease (COVID-19) vaccinations upon entering, in Philadelphia, Pennsylvania, U.S., August 7, 2021. REUTERS/Hannah Beier

WASHINGTON, Nov 3 (Reuters) - The U.S. services industry grew at its slowest pace in nearly 2-1/2 years in October, but businesses continued to face higher prices for inputs, confirming that inflation was shifting to services from goods.

The Institute for Supply Management (ISM) said on Thursday its non-manufacturing PMI fell to 54.4 last month, the lowest reading since May 2020, from 56.7 in September.

Economists polled by Reuters had forecast the non-manufacturing PMI slipping to 55.5. A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of U.S. economic activity.

The Federal Reserve's stiff interest rate increases are slowing demand in the overall economy.

The U.S. central bank on Wednesday raised its policy rate by another three-quarters of a percentage point to a range of 3.75% to 4.00%. However, it signaled future increases in borrowing costs could be made in smaller steps to account for the "cumulative tightening of monetary policy" it has enacted so far.

It was the fourth straight 75-basis-point rate hike as the Fed fights to bring inflation back to its 2% target.

The ISM's measure of new orders received by services businesses fell to 56.5 from 60.6 in September. Businesses, however, reported a sharp drop in exports, likely because of slowing global growth and a strong dollar.

Its gauge of prices paid by services industries for inputs increased to 70.7 from 68.7 in September.

That was in stark contrast with the ISM's manufacturing survey earlier this week, which showed raw material prices fell for the first time in 28 months in October and supplier deliveries performance the best since 2009.

Goods inflation is subsiding as demand rotates back to services. The shift towards services suggests it could take a while for overall inflation to be tamed.

The ISM survey's measure of services industry supplier deliveries increased to 56.2 last month from 53.9 in September. A reading above 50 indicates slower deliveries. The backlog of unfinished work was little changed.

Its services industry employment gauge dropped to 49.1 from 53.0 in September. That marked the fifth time this year that this measure has contracted.

With job openings unexpectedly increasing in September and 1.9 positions for every unemployed person, the decline is most probably a function of worker shortages.

Services businesses in the ISM survey in September reported hiring remained a challenge and qualified workers were scarce.

Reporting by Lucia Mutikani; Editing by Chizu Nomiyama

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