U.S. service sector growth solid in September; price pressures easing - ISM survey

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WASHINGTON (Reuters) - The U.S. services industry slowed modestly in September, while employment surged and a measure of prices paid by businesses for inputs fell to more than a 1-1/2-year low, suggesting underlying strength in the economy despite rising interest rates.

The Institute for Supply Management (ISM) said on Wednesday its non-manufacturing PMI dipped to a reading on 56.7 last month from 56.9 in August. Economists polled by Reuters had forecast the non-manufacturing PMI falling to 56.0.

A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of U.S. economic activity. The economy is slowing as the Federal Reserve aggressively tightens monetary policy to quell inflation.

The U.S. central bank has hiked its policy rate from the near-zero level at the beginning of this year to the current range of 3.00% to 3.25%, and last month signaled more large increases were on the way this year.

Higher borrowing costs are weighing on the housing market and starting to strain the manufacturing industry. The ISM reported on Monday that its manufacturing PMI dropped in September to the lowest reading since May 2020.

Services activity is being supported by a shift in spending from goods, though demand for services is starting to slow.

The ISM's measure of new orders received by services businesses slipped to 60.6 from 61.8 in August. Businesses, however, reported a rise in exports.

Its services industry employment gauge shot up to 53.0 from a reading of 50.2 in August. The jump suggested that demand for labor remains strong, even though job openings fell in August by the most in nearly 2-1/2 years. The government reported on Tuesday that there were 10.1 million job openings in August, down from 11.2 million in July.

The ISM survey's measure of supplier deliveries fell to 53.9 from 54.5 in August. With supply chains continuing to improve and employment increasing, the backlog of unfinished work was reduced further. That resulted in services inflation decelerating considerably last month.

A gauge of prices paid by services industries for inputs dropped to 68.7, the lowest reading since January 2021, from 71.5 in August. It mirrored a decrease in the manufacturing survey, raising hope that inflation had peaked, though the descent will probably be slow amid higher prices for sticky components like rents.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)