October 5, 2026

The Institute for Supply Management not only publishes an index of manufacturing activity each month, they publish two days later a survey of service sector firms.  The business activity index for the service sector fell 5.2 points in September to 56.5 after having risen 2 6 points in August.  We tend to focus on the business activity component as a measure of “production” because it seems to track better with the pace of economic activity.  Trump’s imposition of tariffs, federal government layoffs, and deportation of immigrants made people in the service sector nervous throughout 2025.  However, since the beginning of the year this index has moved upwards and is now expanding nicely..

The composite index declined 0.5 points in September to 54.9 after having risen 1.3 points in August..  Steve Miller, CPSM, CSCP, Chair of the Institute for Supply Management’s  Business Survey Committee said, “Thirteen industries indicated growth in September, one more than the previous month, while four reported contraction, one fewer than in August. The September Services PMI^® reading of 54.9 percent is 0.8 percentage point above the 12-month average of 54.1 percent. The uptick of 0.4 percentage point over August’s 12-month average of 53.7 percent marks the ninth straight month that figure has increased.”

He added that, “Tariffs and fuel cost impacts were the most cited issues impacting respondents’ supply chains; in fact, fuel costs were mentioned twice as often as any other single issue impacting performance. Supply chain constraints were also a top concern of respondents and were impacting both lead times and costs. The Employment Index’s first reading above 50 percent in three months seems to have resulted from increasing backlogs, as well as high levels of business activity and new orders. Although business activity and new orders growth rates have eased a bit, the Backlog of Orders index hit its highest level since July 2022 (58.3 percent).”

At its current level the ISM group says that is consistent with 2.1% growth in GDP.

Comments from respondents include:

• “The high cost of diesel fuel has increased the cost of freight dramatically. The high cost is hard on farmers due to the high use of diesel fuel at harvest. The high cost of crude oil has driven nitrogen (for agronomic use) prices to near record highs.” [Agriculture, Forestry, Fishing & Hunting]
• “Interest rates continue to drive buyers out of the market. Half of buyers walking through the door cannot qualify to purchase.” [Construction]
• “Increased competition for deposits and higher funding costs are placing pressure on profitability and moderating growth expectations. Although projections have been revised downward, the bank continues to expect modest growth in both loans and deposits.” [Finance & Insurance]
• “Had vendor communications about more fuel charges and possible tariff reinstatement.” [Health Care & Social Assistance]
• “Demand across commercial client segments remains steady through September, though client decision cycles on discretionary capital projects remain cautious. Wage pressures and software licensing renewals continue to push operational expenses slightly higher, but freight and consumable material lead times have normalized.” [Information]
• “Oil and gas prices are still high, which encourages more production.” [Mining]
• “The cost of fuel continues to impact our cost of providing services.” [Other Services]
• “Shipping containers from overseas are double the cost, causing price increases.” [Retail Trade]
• “Business activity remains strong, but supply chain conditions continue to be challenging. Utilities and materials are experiencing slower availability, with steel particularly difficult to source domestically. We are increasingly having to place orders internationally to secure required materials. Strong business demand is putting additional pressure on supply, contributing to longer lead times, material availability issues and delays in project starts.” [Utilities]
• “Demand remains very strong. Manufacturers have very little breathing room to keep up with demand, and in some cases, typical lead times have slipped. They are not as aggressive on all opportunities and eager to cut prices to secure business. Weekly price increases are the norm these days on commodities products (copper, aluminum and polyvinyl chloride). We are constantly reaching out to any and all suppliers we conduct business with to secure product to meet customer demand.” [Wholesale Trade]

The non-manufacturing orders component fell 1.1 points in September to 59.8 after having risen 3.7 points in September.  The index has expanded for 14 consecutive months. Comments from respondents include: “An increase of 9.2 percent in order volume was mainly driven by wholesale surge in preparation for holiday season” and “Fewer reservations.”

The ISM on-manufacturing index for employment rose 2.3 points in September to 50.1 after having risen 0.4 point in August.. Seven industries reported an increase in employment in September.  Comments from respondents include: “Filling positions that have been vacated due to promotions or retirements” and “Restructuring due to efficiencies gained using AI tools.”

The suppler deliveries component rose 1.9 points in September to 53.2 after having declined 1.5 points in August.  This component is reversed in the sense that a reading above 50 percent indicates slower deliveries to service sector firms which is typically indicative of a strengthening economy.    A reading below 50 percent indicates faster deliveries. Thus, firms reported slower delivery times in September for the 22nd month in a row.  Comments from respondents include:  “Experienced more back orders” and “Supplier lead times are extending due to tariff related delays.”

Finally, the price component rose 1.4 points in September to 74.0 after having risen 1.3 points in August.  Seventeen service sector industries reported an increase in prices paid during the month.  Price pressures are continuing to climb in the service sector in part because of tariffs but, in recent months, the gain was largely related to oil prices.  Miller noted,  “Lumber and pork products were the only commodities reported as down in price in September, with fuel reported as up in price for an eighth month in a row. Petroleum-related products, diesel and gasoline were again reported as up in price in September, as was memory products for the ninth month in a row. The number of commodities in short supply increased from six to seven, with switchgear and computers and related products being notable additions.”

The manufacturing sector of the economy contracted for a couple of years but has rebounded since the beginning of the year . The service sector has also gathered momentum since January. Look for 3.5% GDP growth in the third quarter of 2026 and 2.6% growth for the year as a whole.  We expect to see 2.6% GDP growth in 2027 as well.

.Stephen Slifer

NumberNomics

Charleston, SC