As the U.S. economy navigates a complex landscape marked by shifting employment levels and persistent inflationary pressures, many businesses are adopting a cautious stance, particularly as the nation approaches a pivotal election. The most recent data from the Institute for Supply Management (ISM) reveals a nuanced picture of the services sector, which has expanded for the third consecutive month in September. The Services Purchasing Managers’ Index (PMI) climbed to 54.9, marking its highest level since February 2023, and indicating robust business activity and a rise in new orders. This upward momentum, however, belies the underlying issues of contracting employment and ongoing price pressures.
Despite the encouraging PMI figures, the employment index has contracted for the sixth time this year, suggesting that businesses are hesitant to hire amid an uncertain economic climate. Many firms are holding back on making bold moves, instead choosing to monitor the outcomes of the upcoming November elections and the implications of the Federal Reserve’s recent interest rate cut. As one construction sector professional noted, “While the recent half-point cut is encouraging, it may take another 150 basis points to move the needle in sales.” This sentiment reflects a broader concern: a wait-and-see attitude as companies strategize for 2025 and beyond.
Adding to the complexity, the alternative U.S. Services PMI from S&P Global indicates a slight slowdown in business activity, dipping from 55.7 to 55.2. Despite this reduction, it still signals solid growth, with new business steadily rising. However, Chris Williamson, chief business economist at S&P Market Intelligence, highlighted a worrying trend—companies are increasingly reluctant to hire due to surging input costs and inflation in selling prices, which he attributes to “stubbornly elevated wage growth.” This persistent inflation could complicate the Federal Reserve’s plans for further rate cuts.
Bill Adams, chief economist at Comerica Bank, suggests that the ISM figures could bolster the case for a more gradual approach to easing monetary policy. As the Fed grapples with the dual mandate of fostering employment while controlling inflation, the latest data presents a conundrum. While the central bank’s half-point cut in September was a significant move, Fed Chairman Jerome Powell has indicated a preference for a measured approach moving forward. Powell emphasized that the Fed is not “in a hurry to cut rates quickly,” suggesting a thoughtful consideration of economic conditions as they develop.
The futures market currently anticipates a modest reduction of 25 basis points to the benchmark federal funds rate, which would lower it to a range of 4.5% to 4.75%. However, some experts believe that the recent rate cut may have been premature. Nancy Tengler, CEO and CIO at Laffer Tengler Investments, criticized the Fed for potentially overreacting to economic indicators. She argued that a more conservative approach, similar to that taken by former Chairman Alan Greenspan in the mid-1990s, might have been wiser. By implementing smaller, measured cuts, the Fed could better manage inflation while supporting economic growth.
In the background of these economic shifts lies the looming presidential election, which adds another layer of uncertainty. Respondents to the ISM survey expressed concerns that the election outcomes could significantly influence economic growth and business confidence. Historically, election cycles have a tendency to create fluctuations in market sentiment, and this year appears no different. The combination of a nuanced economic environment and a contentious political landscape suggests that businesses will continue to tread cautiously as they navigate the coming months.
As we approach the next Federal Reserve meeting on November 6 and 7, all eyes will be on how policymakers respond to the evolving economic landscape. The interplay between employment, inflation, and monetary policy will be critical in shaping the recovery trajectory of the U.S. economy. For now, businesses are left to grapple with the uncertainty, balancing growth aspirations against the backdrop of rising costs and shifting political tides.
