ISM Service Above Expectations! Will This Affect The Fed?

<p>The US services sector unexpectedly gained momentum in August, with new orders strengthening and businesses paying higher prices for inputs, signs of potential inflationary pressures still high.</p><p><br /></p><p>The Institute for Supply Management (ISM) announced last Wednesday that the non-manufacturing PMI Index rose to 54.5 last month, the highest reading since February and up from 52.7 in July. A reading above 50 indicates growth in the service industry, which accounts for more than two-thirds of the economy.</p><p><br /></p><p>Economists had predicted that the non-manufacturing PMI would drop to 52.5, and no economist expected a reading higher than 53.9.</p><p><br /></p><p>The Fed has raised the central bank's policy rate by 5.25 percentage points over the past year and a half to curb hyperinflation, and in recent months has welcomed signs that higher borrowing costs are starting to have an impact.</p><p><br /></p><p>Inflation according to the Fed's preferred measure, the price index of personal expenditures (PCE), rose 3.3% in July from a year earlier, down from a peak of 7% last summer, based on data published last week.</p><p><br /></p><p><br /></p><p>Meanwhile, a Labor Department report last Friday showed average monthly job growth was about 150,000 over the past three months, down significantly from 238,000 in the three months to May.</p><p><br /></p><p>Also on Friday, the ISM reported that the manufacturing PMI contracted in August for the 10th month in a row.</p><p><br /></p><p>Those signs of cooling have helped bolster expectations that the Fed will leave policy rates steady at its meeting later this month, and may be done with rate hikes.</p><p><br /></p><p>Fed policy officials see the services sector as key to reducing inflation to their target of 2%, and the ISM report on Wednesday did little to bolster the view that any slowdown in inflation is under way.</p><p><br /></p><p>A gauge of new orders received by service businesses rose to 57.5 last month from 55.0 in July. A gauge of prices paid by service businesses for inputs rose to 58.9 in August from 56.8 in July.</p>