The abrupt slowdown in the service sector is a warning flag and indicative that the Fed needs to continue to cut key . The Institute of Supply Management () announced that its non-manufacturing, service index plunged to 50 in September, down sharply from 52 in August. Since any reading below 50 signals a contraction, the ISM service index is teetering on a precarious level.
The culprit for the decline was that the business activity component slipped to 49.9 in September, down sharply from 55 in August. The new orders component was 50.4 in September, which was also down sharply from 56 in August. Finally, the inventories component plunged to 47.8 in September, down from 53.2 in August. Overall, 10 of the 17 service sector industries that ISM surveyed reported an expansion.
In case you are wondering what else can go wrong, short seller Jim Chanos is warning that the collapse of Utah-based First Brands, a private asset lender in equipment leasing, is another warning that the private credit industry may be teetering. Collateral loans like First Brands made are not a total disaster, since other lenders are coming to the rescue. However, there are signs of stress in credit markets, so that is just another reason why the Fed has to continue cutting key interest rates.
Meanwhile, the September will be postponed, as will all reports from the Commerce Department and Labor Department, while the federal government shutdown persists. Despite the federal government shutdown, there is plenty of evidence of resurging U.S. economic growth.
Believe it or not, the U.S. economy is currently running at a 3.8% annual pace according to the Atlanta Fed’s , but a 5% annual pace is likely in 2026 as all the onshoring efforts boost overall GDP growth. Thanks to the U.S. dollar getting its “mojo” back and the fact that we are importing deflation for China, I am not anticipating inflation to perk up, which should allow the Fed to continue to further cut key interest rates. In other words, we are approaching “economic nirvana,” which is when the “velocity of money” perks up and prosperity rises.
I am expecting the S&P 500 to surge 8% in the fourth quarter and stage an impressive year-end rally. I should add that the S&P 500’s earnings are growing at a faster pace than 8%, so my fourth quarter forecast is conservative. For 2026, I am expecting the S&P 500 to rise 18% as strong corporate earnings persist and we get some more Fed key interest rate cuts.