Dive Brief:

• The U.S. service sector faltered last month as companies put off hiring and business activity slumped to a level signaling contraction for the first time since May 2022, the Institute for Supply Management said Friday.
• A gauge of new orders fell but remained in expansion territory, while a measure for the backlog of orders declined less in September than in August, the ISM found in a survey of purchasing managers. Seven service industries reported contraction, while 10 reported expansion, two fewer than in August, the ISM said. 
• Survey respondents described “moderate or weak growth,” Steve Miller, chair of the services business survey committee at the ISM, said in a statement. “Employment continues to be in contraction territory, thanks to a combination of delayed hiring efforts and difficulty finding qualified staff,” he said.

Dive Insight:

Weak hiring prompted the Federal Reserve last month to cut the main interest rate by a quarter percentage point in the first monetary easing this year.

Fed officials, in a median estimate, forecast that by the end of 2025 they will make two, quarter-point reductions in the benchmark rate from its current range between 4% and 4.25%.

A softening labor market and stalling service sector — which generates nearly 70% of gross domestic product growth — are just two trends in an economy that has recently sent signals of strength as well as weakness.

Consumer spending rose 0.4% in August, the same pace as July, although the Fed’s preferred inflation gauge — the personal consumption expenditures price index minus volatile energy and food prices — remained at a 2.9% annual rate, the Bureau of Economic Analysis said on Sept. 26.

Also, the Atlanta Fed on Wednesday estimated that the economy grew at an annual rate of 3.8% during the third quarter, well above its 2.4% average from 2019 to 2024.

Economic forecasting grew more challenging with the shutdown of the federal government on Wednesday and suspension in the release of official economic data.

Most notably, the Bureau of Labor Statistics indefinitely delayed the release of September data on hiring and other job market trends that was scheduled for release on Friday.

The absence of data complicates decision-making by C-suite executives, investors and Fed policymakers.

“There’s no question — the best jobs data in the world comes from the Bureau of Labor Statistics,” Chicago Fed President Austan Goolsbee said Friday. “We need that data, we want that data.”

Instead, economists can take the pulse of the labor market by using private sector data and state unemployment claims, he said. Over time, though, the estimates will “get farther and farther from the truth.”

The Fed faces the prospect of receiving late data on both the job market and inflation at a particularly challenging juncture for monetary policy, Goolsbee said, noting policymakers’ congressional mandate to ensure stable prices and full employment.

“This uptick of inflation that we've been seeing, coupled with the jobs, payroll jobs numbers deteriorating, have put the central bank in a bit of a sticky spot, where you're getting deterioration of both sides of the mandate at the same time,” he said.

Looking ahead to monetary policy meetings this month and in December, Goolsbee said, “I'm a little wary about front loading too many rate cuts and just counting on the inflation going away.”