WASHINGTON (Reuters) -U.S. business activity picked up in October, but a deterioration in the economic outlook blamed on the Trump administration's protectionist trade policy limited job gains and companies were sitting on piles of unsold goods amid a slump in exports.

S&P Global's flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, increased to 54.8 this month from 53.9 in September. A reading above 50 indicates expansion in the private sector. 

The services sector accounted for most of the improvement, with manufacturing maintaining a steady pace of expansion. 

At face value, the PMI suggested the economy started the fourth quarter on a solid footing. But an official data blackout because of the U.S. government shutdown amid a standoff over funding between Republicans and Democrats in Congress has made it difficult to gauge the economy's health.

August's data showed a stalling labor market as businesses remained reluctant to boost hiring, but consumer spending was resilient, mostly driven by higher-income households.   

"Business confidence in the outlook for the coming year has deteriorated further, and is at one of the lowest levels seen over the past three years as companies worry about the impact of policies, most notably tariffs," said Chris Williamson, chief business economist at S&P Global Market Intelligence. 

"Companies are also concerned over disappointing export sales, especially in manufacturing, and factories are seeing an unprecedented rise in unsold stock."

EXPORT ORDERS SINK TO SIX-MONTH LOW

The survey's measure of new orders received by businesses increased to 54.2 from 53.1 in September. Its gauge of export orders dropped to six-month low of 47.8 from 49.7 in September.

Rising inventory is tempering selling price increases even as businesses continue to face higher costs for inputs. 

A measure of prices asked by businesses slipped to 55.2 from 56.5 in the prior month. A measure of prices paid for inputs edged up to 60.8 from 60.6 in September, attributed to tariffs.

It is unclear what the implications are for inflation. Though consumer prices have risen amid the pass-through from tariffs, they have not sky-rocketed as economists had feared.

There are indications that businesses have absorbed most of the import duties and have also been selling merchandise accumulated before President Donald Trump's wide-ranging tariffs. Though the S&P Global survey reported businesses were carrying excess inventory, government data last month showed inventories were drawn down in the second quarter.

Economists say companies are absorbing import duties at the expense of hiring more workers. The Federal Reserve is expected to cut interest rates again next week to shore up the labor market. The survey's measure private sector employment rose to 51.4 from 50.6 in September. All the gains came from the services sector, with factory employment growth slowing.

S&P Global said employment growth in both sectors "was curtailed by a lack of suitable candidates to replace leavers but also reflected concerns over staffing needs given current sales levels and uncertainty over the demand outlook."