The significant increase in service activities in September was an encouraging surprise given the growing concerns over slowing growth.
The Institute for Supply Management said on Thursday that its service sector index grew to 54.9 in September from 51.5 in August. That was the fastest pace of growth since early last year.
At the same time, though, the impressive growth rate did not equate to more job gains as the employment subindex contracted. The subindex fell to 48.1 from 50.2; anything below 50 indicates contraction.
This contradiction supports our thesis that because the economy is performing at full employment, robust growth does not require robust job gains. After rapidly adding new workers, companies are reaping the benefits from those talents, while looking to control their labor costs by not aggressively adding more jobs as the economy normalizes.
Three things can be true at the same time when we are at full employment: high growth, low layoffs and low job gains.
Read more of RSM’s insights on the economy and the middle market.
We expect the unemployment rate to stay at 4.2%, payroll gains to remain at a solid 120,000 to 160,000, and GDP growth to be a strong 3%.
Looking forward, we expect the service sector to continue to drive growth as shown in the new orders subindex, which was also at the highest level since February last year at 59.4.
The takeaway
As activities grow, prices should increase at the same time. The prices paid subindex was at the highest level since January at 59.4. But that remained low compared to the previous two years and also compared to the average before the pandemic. We don’t see the increase in prices as a significant threat to inflation as of now.
