By Lucia Mutikani
WASHINGTON (Reuters) -U.S. services sector activity picked up in October amid a solid increase in new orders, but subdued employment pointed to lackluster labor market conditions against the backdrop of economic uncertainty stemming from tariffs on imports.
The Institute for Supply Management said its nonmanufacturing purchasing managers index rose to 52.4 last month from 50.0 in September. Economists polled by Reuters had forecast the services PMI climbing to 50.8. The services sector accounts for more than two-thirds of U.S. economic activity.
At face value, the PMI would suggest solid economic activity at the start of the fourth quarter. But the longest government shutdown in history has caused an official economic data blackout, obscuring the economic view.
The nonpartisan Congressional Budget Office estimated the shutdown, now on its 36th day, could slice between 1.0 percentage point and 2.0 percentage points off gross domestic product in the fourth quarter. The CBO estimated most of the decline in GDP would be eventually recovered, but projected between $7 billion and $14 billion would not be.
The third-quarter GDP report was due last month. The economy grew at a 3.8% annualized rate in the second quarter. The ISM survey’s measure of new orders received by services businesses increased to 56.2 last month from 50.4 in September. But backlog orders plunged while exports remained depressed.
EXPORT ORDERS WEAK AMID TRADE TENSIONS
Weak export orders mirrored the findings in the ISM manufacturing survey on Monday, which noted “ongoing trade friction.” President Donald Trump’s sweeping tariffs have caused tensions with trade partners, including China and Canada.
The U.S. Supreme Court on Wednesday will hear arguments on the legality of Trump’s import duties. Trump has defended the tariffs as necessary to protect domestic manufacturing.
With orders picking up, so did prices paid by services businesses for inputs. The pace of increase was, however, moderate, aligning with recent data that suggested a cooling in services inflation. The survey’s measure of prices paid by businesses inched up to 70.0 from 69.4 in September.
Rising orders did little to stimulate employment. The survey’s gauge of services sector employment climbed to a still-subdued 48.2 from 47.2 in September. This measure has now contracted for five straight months.
Economists say demand for labor has ebbed because of economic uncertainty, tariffs and companies embracing artificial intelligence. A sharp reduction in workers because of raids on undocumented immigrants is also weighing on the labor market.
A survey from the Conference Board last month showed consumers’ perceptions of the labor market remained downbeat in October. The unemployment rate was near a four-year high of 4.3% in August.
The Federal Reserve last month lowered its benchmark overnight interest rate by 25 basis points to the 4.00%-4.25% range, to aid the labor market. Fed Chair Jerome Powell cautioned that the lack of government economic data could put another rate cut out of reach this year.
(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama )
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