The country’s procurement and supply officials for services said business activity in the services sector expanded for the third consecutive month in September. The services PMI came in at 54.9 percent, the highest reading since February 2023 and indicates sector’s expansion for the forty-ninth time in 52 months.
The report was released today by Steve Miller, chairman of the Institute for Supply Management’s Services Business Survey Committee in September, the services PMI came in at 54.9 percent, 3.4 percentage points higher than August’s figure of 51.5 percent. The September reading was the seventh time the composite index was in expansion zone this year. The business activity index came in at 59.9 percent in September, 6.6 percentage points higher than the 53.3 percent recorded in August, marking the third month of expansion after contraction in June. The new orders index expanded to 59.4 percent in September, 6.4 percentage points higher than August’s figure of 53 percent. The employment index contracted for the first time in three months, with a reading of 48.1 percent, down 2.1 percentage points from 50.2 percent recorded in August.
“The Supplier Deliveries Index came in at 52.1 percent, which is 2.5 percentage points higher than the index grew by 49.6 percent in August. The index returned to expansion in September, suggesting a slowdown in supplier delivery performance after two months of contraction or “acceleration”. (The supplier delivery index is the only one that is reversed; a reading of more than 50 percent indicates that deliveries are slowing, which is normal as the economy improves and customer demand increases.)
Impact of different sectors on PMI
Different sectors significantly influence overall PMI readings, with each sector reflecting unique economic conditions, challenges and growth dynamics. Here’s how different sectors affect overall PMI readings:
1. Manufacturing Sector
Contribution to the PMI: The manufacturing PMI focuses specifically on the manufacturing sector, which includes industries such as automotive, electronics, textiles and machinery.
Key indicators: Factors such as production levels, new orders and inventory management directly affect the PMI. If manufacturing activity is strong, it usually leads to a higher PMI reading. which may indicate inflationary pressures
Impact on economic growth: The manufacturing sector often drives economic cycles. Strong growth here could signal strong economic overhaul, pushing the composite PMI higher.
2. Services Sector
Contribution to PMI: The services PMI covers a wide range of industries, including finance, healthcare, retail and hospitality.
Key indicators: Metrics such as business activity, new business and employment levels in the services sector are crucial. The growing services sector typically reflects increased consumer spending and confidence.
3. Construction Sector
Contribution to PMI: Although often included in the services PMI, the construction sector plays a vital role in overall economic health and can influence PMI readings.
Key indicators: Factors such as new construction projects, housing construction starts, and infrastructure spending can affect both manufacturing and service PMI.
4. Retail Sector
Contribution to PMI: The performance of the retail sector is mainly captured in the services PMI.
Key indicators: sales figures, inventory levels and consumer sentiment are critical. Strong retail performance indicates healthy consumer demand, boosting services PMI readings.
The role of the PMI in shaping inflation expectations
The Purchasing Managers’ Index (PMI), especially in its various forms (manufacturing PMI and Services PMI), plays an important role in shaping inflation expectations. Here’s how it affects inflation perceptions:
1. Economic activity index
Growth signal: The PMI measures the health of the manufacturing and services sectors. Readings above 50 indicate expansion, while readings below 50 indicate contraction. Strong growth in these sectors could lead to increased demand for goods and services, which could exert upward pressure on prices.
2. Price Components
Paid Price Index: In PMI reports, there are specific components that track the prices paid for inputs. An increase in this indicator suggests that firms are experiencing higher costs for raw materials and services, which may indicate inflationary pressures.
3. Supply Chain Constraints
Lack of input: If the PMI indicates that companies are experiencing supply chain constraints or lack of input, this could lead to increased costs for businesses. These costs are often passed on to consumers, contributing to inflation.
4. Employment and wages
Labor market insights: A strong PMI is often associated with increased employment and wage growth as companies expand their operations. Higher wages can increase consumers’ disposable income, which can boost demand and push prices up.
5. Future demand forecast
Business optimism: A high PMI reading often reflects business optimism about future demand. If companies expect strong demand, they may raise prices in anticipation, which could contribute to inflation expectations.
6. Monetary Policy Response
Central bank actions: Central banks, such as the Fed, closely monitor purchasing managers’ indices as part of their economic assessments. If PMIs indicate strong growth and higher prices, central banks may respond by tightening monetary policy (e.g., raising interest rates) to manage inflation.
