US services industries expand at weakest pace in six years

The services slowdown raises questions about the economy's strength ahead of the Federal Reserve's meeting in September.
The services slowdown raises questions about the economy's strength ahead of the Federal Reserve's meeting in September.PHOTO: REUTERS

WASHINGTON (BLOOMBERG) - 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 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 US 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 ahead of the Federal Reserve's meeting later this month.

While a poor report "raises a red flag about the momentum in services, I wouldn't put too much emphasis on a single month," Ryan Sweet, a senior economist at Moody's Analytics Inc. in West Chester, Pennsylvania, said before the data. "The weakness would have to stick for several months for us to be really concerned. The non-manufacturing side of the economy has been doing reasonably well."

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.

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 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. 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.