Services Growth Cooled in October, but the Cost Pressure Did Not

U.S. services activity expanded for a 28th straight month in October, cooling slightly as new orders slowed from September's pace.

The Services PMI registered 54.5 in October, down 0.4 percentage point from 54.9 in September. Economists polled by Reuters had expected 54.8, so the print landed just below expectations.

These are diffusion indexes, built from a survey of purchasing and supply executives. A reading above 50 means more firms reported growth than decline. Services account for more than two-thirds of U.S. economic activity.

ISM said the October reading points to overall economic expansion for a 77th straight month. The headline index also sat just above its 12-month average of 54.3. That is a picture of steady growth, not acceleration.

Activity and orders cooled

The Business Activity Index fell to 53.8, down 2.7 percentage points from 56.5 in September. The New Orders Index fell further, to 55.9, down 3.9 percentage points from 59.8.

The cooling was not a stall. Fifteen industries reported growth in October, two more than in September. For the first time since February 2026, all 10 survey indexes were in expansion territory.

New orders have now grown for 17 straight months, even after the October step back. Thirteen industries reported higher business activity during the month. Only Construction and Real Estate, Rental and Leasing reported lower activity.

Hiring firmed while deliveries slowed

The Employment Index rose to 51.4, up 1.3 percentage points from 50.1 in September. Hiring expanded for a second straight month. Six industries reported higher employment, led by Transportation and Warehousing.

Supplier Deliveries rose to 56.7, up 3.5 percentage points from 53.2. This index is inversed, so a reading above 50 means deliveries got slower, not faster. Deliveries have now slowed for 23 straight months.

Backlogs grew alongside the delays. The Backlog of Orders Index rose to 58.0, its highest reading since July 2022. Fuller order books help explain why firms are hiring even as new orders cool.

Prices stayed near the top of the range

The Prices Index eased to 73.0, down 1.0 percentage point from 74.0 in September. That remains an extremely high reading. It has now printed above 70 for the seventh time in eight months.

The prices index measures breadth, not size. A reading of 73.0 does not mean prices rose 73.0%. It means far more firms paid more for inputs than paid less. No commodity was reported down in price in October.

Chair Steve Miller warned that the pressure may not have peaked. "Many respondents indicated they are not yet seeing the full impact of these cost escalations or have not passed them through to customers," Miller said.

Miller added that more pricing pressure is on the way if oil and tariff cost impacts are not mitigated. Fuel was reported up in price for a ninth straight month. Tariffs and fuel costs were the most-cited supply-chain issues in the survey.

The streak behind the reading is long. Prices paid by services firms have now increased for 113 straight months. Seventeen industries reported paying more in October, and none reported paying less.

Trade and inventories added support

The Imports Index rose to 54.2, up 1.3 percentage points, in expansion for a fourth straight month. New Export Orders jumped to 55.2, returning to expansion after one month in contraction.

The Inventories Index eased to 55.4, still growing for a ninth straight month. The Inventory Sentiment Index rose to 52.1. That index reads above 50 when firms judge their stock too high for current demand.

What remains unknown

What remains unknown starts with pass-through. The survey shows services firms paying more, broadly. It does not show how much reaches customer prices, or how much margins absorb. Miller's warning says some of that pressure is still in the pipeline.

Also unknown is whether the orders cooling is a pause or a turn. New orders remain solidly in expansion at 55.9. But a near-four-point drop in one month is the kind of move that needs a second reading to judge.

The hiring signal is also young. Employment has expanded for only two straight months after a soft stretch. One more firm reading would say more about whether backlogs are pulling staff in.

What to watch next

What to watch next begins Friday, November 6, with the October jobs report. A Reuters survey expects payrolls to rise by 65,000, after a 29,000 gain in September. Those are expectations, not outcomes, and the survey's firmer hiring index will be tested against them.

The unemployment rate is expected to hold at 4.2% in the same report. A surprise there would matter more for rate expectations than the survey itself. The next ISM Services report follows on December 3.

Watch the prices breadth most of all. If the Prices Index cools toward the 60s, the cost story is easing. If it holds above 70 while backlogs stay full, services inflation pressure runs into year-end.