MACRO: US service sector grows in September, however employment index weakens

Activity in the US services sector unexpectedly grew at a slightly faster pace in September, according to a report published on Tuesday by the Institute for Supply Management. The ISM Services PMI edged up to 61.9 in September from 61.7 in August, beating market expectations of 61.3 amid strong demand and despite widespread supply-chain and labor shortages. 

The September reading indicates the 16th straight month of growth for the services sector, which has expanded for all but two of the last 140 months. Source: Bloomberg via ZeroHedge

Further details of the publication revealed that the Prices Paid Index jumped to 77.5 from 75.4 and the New Orders Index rose to 63.5 from 63.2. However, the closely watched Employment Index edged down to 53.0 from 53.7 which indicates that the services sector is grappling with shortages of labor. Comments from respondents include: "Employee flight to better-paying jobs and lack of a pipeline to replace" and "Labor shortages experienced at all levels." There are little signs that these headwinds will recede anytime soon.

This is especially important regarding the upcoming labor market data. The monthly ADP payroll report will be published tomorrow and the Bureau of Labor Statistics nonfarm payroll data prints on Friday. Economists are cautiously optimistic that the labor market recovery will gain steam in the coming months following the expiration in September of federal government-funded unemployment benefits, which businesses blamed for the labour shortages. The expectation is that the numbers will be good enough to give the Fed a green light for tapering its $120 billion in monthly bond purchases. However, given the declining growth rate of the employment index in the services sector, it should be taken into account that labor market reports may not meet market expectations.