• The ISM Services PMI eased to 54.9 in September from 55.4 in August, still signaling solid expansion but at a slower pace.
  • Prices paid accelerated sharply to 74.0—a 13th straight month of increases—while the employment index rose back above 50 to 50.1.
  • The report points to a still-resilient services economy facing sticky cost pressures, reinforcing expectations that the Federal Reserve may keep interest rates higher for longer.

Growth remains solid, but momentum fades

The U.S. services sector continued to expand in September, though the pace of growth moderated slightly, according to the latest report from the Institute for Supply Management. The headline services PMI registered 54.9, down from 55.4 in August, marking the 27th consecutive month of expansion for the sector. A reading above 50 indicates month-over-month growth.

Business activity, which measures production, slipped to 56.5 from 61.7—a notable deceleration that suggests output growth is cooling from a robust summer pace. New orders remained strong at 59.8, just below August’s 60.9, indicating that demand for services across the economy remains healthy. The employment index moved back into expansion territory at 50.1, up from 47.8 in August. That shift is significant because the prior reading was the second consecutive contraction and the index had been below 50 in 13 of the preceding 18 months.

“The combination of still-solid new orders and a rebound in hiring suggests the services economy is not slipping into recession,” said one economist familiar with the survey. “But the pullback in business activity shows that growth is moderating.”

Inflation alarm bells ring louder

The most striking detail in the September report was the jump in the prices-paid index to 74.0 from 72.6 in August. That reading indicates that a substantially larger share of purchasing managers are facing rising input costs. In August, ISM noted that prices had risen for 111 consecutive months, with all 15 reporting services industries experiencing higher prices and none reporting a decline. The September figure marks another month of broad-based cost increases.

Respondents have repeatedly cited tariffs, the Middle East conflict, and elevated costs for petroleum-based products, diesel, gasoline, freight, steel, memory products, software licensing, and labor. Shortages of GPUs, memory components, steel, wire and cable, and labor were also mentioned.

“Service-sector inflation remains stubbornly high,” a Fed watcher said. “This is exactly the kind of evidence that makes policymakers wary of easing too quickly.”

Higher-for-longer rates back in focus

For financial markets, the report is likely to reinforce expectations that the Federal Reserve will maintain a restrictive stance for longer. While the Fed focuses on actual inflation measures rather than a single survey, persistent cost pressure in services is a signal that could keep additional tightening in consideration—or at least delay any pivot to rate cuts.

Rate-sensitive assets, including growth equities, highly leveraged firms, and commercial real estate, may face pressure if yields stay elevated. Financials could benefit from higher yields, though the outcome depends on the yield curve, credit quality, and loan demand.

The employment rebound, while modest, resolves part of the inconsistency from August, when strong output and demand coexisted with contracting services employment. Still, firms may remain selective in hiring if their cost base continues to rise faster than their ability to pass prices on.

What to watch

Markets will now turn to upcoming consumer-price, producer-price, wage, spending, and employment data for a clearer picture of inflation trends. A second consecutive reading above 70 in the prices-paid index makes the signal harder to dismiss, and sectors most exposed to continuing cost pressure include transportation and warehousing, retail, accommodation and food services, construction, and information technology.

The key tension to monitor is whether the September employment improvement persists while output growth moderates—an outcome that would support a soft landing—or whether high prices erode consumer demand and force a sharper slowdown later. For now, the ISM data paint a picture of a services economy that is still growing, but increasingly inflation-prone.

Correction: A previous version of this article misstated the number of consecutive months of expansion in the services sector. It is 27, not 26.