Dive Brief:
- The U.S. services sector slowed this month as inflation — fueled by tariffs and rising prices for diesel and other fuels — prompted customers to trim new orders, the Institute for Supply Management said Monday.
- The ISM’s purchasing managers’ index for the services sector fell to 54.9% from 55.45 in August, ISM said. An index for prices hit the highest level in four years, ISM said, citing a monthly survey.
- “Tariffs and fuel cost impacts were the most cited issues impacting respondents’ supply chains,” Steve Miller, chair of ISM’s services business survey committee, said in a statement. “In fact, fuel costs were mentioned twice as often as any other single issue impacting performance,” he said.
Dive Insight:
The services sector, which drives more than 75% of U.S. gross domestic product growth, has helped sustain the economy despite tariffs, the war with Iran and rising borrowing costs.
GDP during the second quarter grew at an annual rate of 2.2%, the Commerce Department said Wednesday, raising its prior estimate by 0.7 percentage point.
Estimates for third-quarter growth are brighter: The economy during Q3 likely expanded at an annual rate of 3.7%, according to an Atlanta Fed forecast.
Still, the war with Iran has likely hindered economic growth beyond services by pushing up energy prices. The price for a gallon of diesel fuel has surged during the past year by about 70% to $6.32 per gallon, according to AAA.
A gauge of inflation, the personal consumption expenditures price index, rose 0.3% in August compared with July and by 3.4% on an annual basis, the Commerce Department said Wednesday.
The rise in the ISM prices index “likely reflected a further increase in motor fuel prices, especially diesel,” Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs said.
The ISM survey “covers several sectors exposed to the energy price shock, including construction, transportation, retail and wholesale,” he said in a note.
Rising energy costs have pushed up prices across the economy. Core PCE, which excludes volatile energy and food prices, increased 0.2% in August compared with July and 3% on an annual basis.
“The high cost of diesel fuel has increased the cost of freight dramatically,” a respondent to the ISM survey said.
“The high cost is hard on farmers due to the high use of diesel fuel at harvest,” ISM quoted the respondent as saying. “The high cost of crude oil has driven nitrogen (for agronomic use) prices to near record highs,” the respondent said.
