U.S. service industries expanded in October at the slowest pace in five months as orders and employment cooled, indicating more moderate growth in the biggest part of the economy.
The Institute for Supply Management's services index declined to 56.6 during the month from 57.8 in September, according to data released on Wednesday. Readings above 50 indicate expansion, and the October figure was weaker than all but one estimate in a Bloomberg survey of economists that had called for 57.5.
While still at a healthy level, the index shows less momentum among service industries that include leisure and hospitality, dining and travel. A resurgence in coronavirus cases and the potential for tighter restrictions on business risks impacting service providers disproportionately.
"Respondents' comments are cautiously optimistic about business conditions and the economy," Anthony Nieves, chair of the ISM Services Business Committee, said in a statement. "There is a degree of uncertainty due to the pandemic, capacity constraints, logistics and the elections."
At the same time, steady consumer demand for merchandise and a pickup in business investment is generating more activity for the nation's factories. The ISM manufacturing index released Monday showed faster growth in new orders, employment and production.
The divergence in activity at service providers and manufacturers has its roots in a shift in consumer spending preferences. The value of household outlays for merchandise expanded in the third quarter at a 45.4% annualized pace to $5.14 trillion, well above the pre-pandemic peak. In contrast spending on services grew at a 38.4% rate to $7.93 trillion, well short of the value at the end of 2019, last week's gross domestic product report showed.
Sixteen of 18 service industries reported growth in October, led by transportation and warehousing, construction and accommodation and food services.
The ISM's index of new orders at service providers eased 2.7 points to 58.8. The measure of service-related business activity, which parallels the ISM's factory production index, fell to 61.2 from 63, while the measure of services employment decreased 1.7 points to 50.1. The government's October employment report on Friday is projected to show payrolls rose 600,000, indicating the pace of overall hiring is improving but at a slower pace.
ISM's gauge of exports expanded at a faster rate in October, indicating stronger demand from overseas customers.