U.S. Services Sector Hits 54.5% in October, but Inflation Bites

By Daniel Okafor

America's service sector grew at a rapid clip in October — 54.5% on the Institute for Supply Management's closely watched survey, down slightly from 54.9% in September. Any reading above 50 signals expansion. The sector that employs most Americans is still barreling ahead.

The catch is inflation. Businesses cited rising supply costs, tariffs from the Trump administration, and high oil prices tied to the Iran war as their biggest obstacle heading into the holiday shopping season. Growth is strong. Cost pressure is stronger.

What does the ISM survey actually measure?

The Institute for Supply Management polls service companies — banks, retailers, restaurants — each month. It is one of the earliest readings on the economy's health. Service firms employ most Americans and account for a much larger share of output than manufacturers.

A companion survey of manufacturers, released a few days earlier, was also strong. The boom in artificial intelligence that has lifted the industrial side of the economy now appears to have spread to services as well, according to the ISM data.

What are the key numbers?

• Headline activity: 54.5% in October, versus 54.9% the prior month.
• New orders, a sign of future sales, retreated from a three-and-a-half-year high set a few months ago but remained robust.
• Employment gauge rose for the second straight month, though not enough to signal a big upturn in a sluggish U.S. labor market.
• The prices-paid index topped 70% for the fourth month in a row. When inflation is low, that measure typically runs in the 50s and low 60s.

That last figure is the mechanism of the story. Companies pay more for supplies, wait longer to get them, and then hold hiring tight to protect their margins.

What did business executives say?

One executive at a management-services company put it plainly in the survey: "While business activity remains strong, the impacts of tariffs, increased fuel prices, and longer lead times are becoming more challenging."

That quote captures the tension in the data. Demand is rising. Most businesses report growth and increased demand, a good sign for the broader economy. But managing costs and keeping customers happy has rarely been harder, and firms are keeping a tight rein on hiring as part of an effort to keep their own costs down.

How did markets and politics respond?

The Dow Jones Industrial Average and the S&P 500 rose in Wednesday trading after Democrats made huge gains in the U.S. elections, capturing both the House and the Senate.

Inflation was one of the biggest factors in those elections. Frustrated voters delivered a historic win for Democrats and left Republicans in political disarray.

The politics and the economics point the same way. Prices-paid readings above 70% for four consecutive months explain why inflation dominated the campaign, and why the electoral map shifted as it did.

What happens next?

Watch the prices-paid index and the employment gauge in the coming ISM reports. If supply costs stay above 70% while new orders soften from their three-and-a-half-year high, companies will face a squeeze between demand they cannot fully serve and costs they cannot fully pass on — a combination that typically shows up first in hiring plans, then in consumer prices.