U.S. Services Industries Expand at Weakest Pace in Six Years

  • ISM index drop follows gauge showing manufacturing contraction
  • Figure is below lowest estimate in survey of economists

America’s service industries expanded in August at the weakest pace in six years, joining manufacturers in an abrupt slowdown that may signal waning optimism about the economy.

The Institute for Supply Management’s non-manufacturing index slumped to 51.4, the lowest since February 2010, from 55.5 in July, the Tempe, Arizona-based group’s report showed Tuesday. While a reading above 50 indicates the industries that make up almost 90 percent of the economy are expanding, the figure is lower than the most pessimistic projection in a Bloomberg survey.

Measures of orders and business activity skidded by the most since 2008, when the U.S. was in a recession, and an employment index moved closer to stagnation. Following the group’s factory survey, which showed manufacturing unexpectedly contracted, and separate figures indicating hiring cooled in August, the services slowdown raises questions about the economy’s strength, adding to the case for the Federal Reserve to hold off on raising interest rates this month.

“There’s no good news in this report, but it is just one month,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “September’s going to be very important -- if the weakness persists, then that would raise some concern about the health of the non-manufacturing segment of the economy.”

Markets Dip

Stocks fell, bonds climbed and the dollar weakened against most of its major peers after the data were released, with the greenback dropping by the most in five weeks as investors digested the implications for the Fed. Policy makers meet Sept. 20-21 in Washington.

Seven of 18 industries in the survey showed a contraction in August, including retail; arts and entertainment; transportation and warehousing; and mining. That compares with three industries in the July survey.

The setback to demand for services is a surprise given that households are still spending at a solid clip and home sales remain sturdy. The weakness across services and manufacturing may reflect adjustments to capital-spending plans amid declining corporate profits.

Trend Question

With factories still trying to regain their footing after the combined hit from the stronger dollar, lower oil prices and sluggish global markets, the task of propping up economic growth has been falling to non-manufacturing industries.

The report “still reflects growth, just at a much slower rate,” Anthony Nieves, chairman of the ISM non-manufacturing survey, said on a conference call with reporters. Given that the July pace seemed unsustainable, there’s a need to see how the data pan out in the coming months before concluding whether the August slowdown is a trend, he added.

The median forecast in a Bloomberg survey of economists called for 54.9, with estimates ranging from 52.6 to 56.6.

The ISM group’s non-manufacturing survey covers an array of industries including utilities, retailing and health care, and also factors in construction and agriculture.

The business activity index, which parallels the ISM’s factory production gauge, dropped to 51.8 from the prior month’s 59.3. It was the lowest level since January 2010 and the steepest slide since November 2008.

“I’m not terribly worried about the fate of the economy, but I do feel even more comfortable today than I did a week ago calling for no Fed move in September,” Stephen Stanley, chief economist at Amherst Pierpont Securities LLC, said in a research note.

The new orders measure fell to 51.4 from 60.3, marking the lowest level since December 2013 and largest decrease since January 2008. A gauge of order backlogs fell to 49.5 from 51.

The employment gauge decreased to 50.7 from 51.4, the second straight drop.

The ISM manufacturing index released on Sept. 1 showed activity contracted in August for the first time in six months, with producers cutting orders and production and pulling back on hiring.

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