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U.S. service sector slows in March; inflation cooling – ISM survey

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The U.S. services sector slowed more than expected in March as demand cooled, while a measure of prices paid by services businesses fell to the lowest in nearly three years, giving the Federal Reserve a boost in the fight against inflation.

The Institute for Supply Management (ISM) said on Wednesday that its non-manufacturing PMI fell to 51.2 last month from 55.1 in February. A reading above 50 indicates growth in the services industry, which accounts for more than two-thirds of the economy. Economists polled by Reuters had forecast the non-manufacturing PMI decreasing to 54.5.

The PMI remains above the 49.9 level which the ISM says over time indicates growth in the overall economy. Nevertheless, the softer-than-expected reading, coming on the heels of continued weakness in manufacturing activity last month, increases the risk of a recession this year.

The ISM reported on Monday that its manufacturing PMI fell in March to the lowest level since May 2020. It was the first time since 2009 that all subcomponents of the manufacturing PMI fell below the 50 threshold.

The services sector is being supported by consumers switching spending from goods, which are typically bought on credit. The survey’s gauge of new orders received by services businesses dropped to 52.2 last month from 62.6 in February.

With demand cooling, services sector inflation continued to subside, though it remains elevated. A measure of prices paid by services industries for inputs fell to 59.5 from 65.6 in February. The services sector is now at the heart of the fight against inflation as services prices tend to be stickier and less responsive to interest rate increases.

Some economists view the ISM services prices paid gauge as a good predictor of personal consumption expenditures (PCE) inflation. The Fed, which has a 2% inflation target, tracks the PCE price indexes for monetary policy.

Last month’s slowdown in prices paid by services businesses also reflected a continued improvement in supply. The survey’s measure of services industry supplier deliveries fell to 45.8 from to 47.6 in February. A reading below 50 indicates faster deliveries.

Services sector employment growth also moderated. The survey’s measure of services industry employment fell to 51.3 from 54.0 in February.

That added to evidence that the labor market was loosening.

The government reported on Tuesday that there were 9.9 million job openings at the end of February, the lowest level since May 2021. Still, there were 1.7 job openings for every unemployed person in February.

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