US service sector contracts in April; price pressures reaccelerate

(Reuters) – The U.S. services sector contracted in March, while a measure of prices paid by businesses for inputs jumped, a worrisome sign for the outlook on inflation.

The Institute for Supply Management (ISM) said on Friday that its non-manufacturing PMI fell to 49.4 last month from 51.4 in March, the lowest reading since December 2022.

A reading above 50 indicates growth in the services industry, which accounts for more than two-thirds of the economy. The PMI adds to evidence that the economy is beginning to lose some steam after expanding at a solid pace.

Economists polled by Reuters had forecast the index edging up to 52.0 in April.

The slowdown in economic growth comes after 525 basis points worth of interest rate hikes from the Federal Reserve since March 2022 designed to quell elevated inflation.

The U.S. central bank had been expected to start cutting interest rates this year, but doubts now persist amid a stalling in progress on bringing inflation back down to its 2% goal.

A measure of new orders received by services businesses dipped to 52.2 last month from 54.4 in March, the lowest reading since last September. Production also faltered, with a gauge of business activity dropping to 50.9 from 57.4 in the prior month, to levels last seen at the onset of the COVID-19 pandemic in May 2020.

Despite demand slowing, services inflation appears to have picked up again. The survey’s measure of prices paid for inputs by businesses jumped to 59.2 from 53.4 in March. Data last week showed services inflation quickened in March.

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The survey’s measure of services sector employment fell to 45.9 from 48.5 in March. Government data on Wednesday showed the labor market continues to gradually cool, with job openings falling to a three-year low in March and the number of people quitting their jobs declining. There were 1.32 job openings for every unemployed person in March compared to 1.36 in February.

April’s employment report on Friday showed that nonfarm payrolls increased by 175,000 jobs last month after rising by 315,000 in March. The unemployment rate edged up to 3.9%, and annual wage growth ebbed to 3.9% from 4.1% in March.

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