U.S. Service-Sector Index Shows Slowest Growth Since 2010
Some economists say ISM report should give Fed pause at September meeting
Wal-Mart workers greet customers at a store in Horn Lake, Miss., in January. PHOTO:ASSOCIATED PRESS
WASHINGTON—A gauge of U.S. service-sector activity sank in August to its lowest level in more than six years, signaling slowing growth in key sectors of the U.S. economy ahead of a policy meeting of Federal Reserve officials.
The Institute for Supply Management on Tuesday said its nonmanufacturing index fell to 51.4 in August from 55.5 in July, the lowest reading since February 2010, and well below a consensus expectation of 55.0 from economists surveyed by The Wall Street Journal.
But it comes on the heels of an early-September ISM manufacturing report showing the factory sector contracted in August and a jobs report signaling a slowdown in the pace of hiring, raising questions over whether the U.S. economy is moving into a period of sustained weakness or whether August’s flurry of weak data was just a blip.Although the index dropped sharply, the service sector overall remains in growth territory. A reading above 50 signals expansion while a reading below 50 indicates contraction. The index has run above the 50 threshold for 79 straight months.
In late August, Fed Chairwoman Janet Yellen had said she believedthe case for increasing the federal-funds rate “has strengthened in recent months.” But economists said the ISM report should give Fed officials pause at their Sept. 20-21 meeting.
“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,” said Stephen Stanley, chief economist at Amherst Pierpont Securities.
“For those Fed officials who are having a difficult time deciding what to do at this month’s meeting, all of the major August data out so far (auto sales, payrolls, both ISMs) have been noticeably weaker than expected,” Mr. Stanley said in a note to clients.
Anthony Nieves, who oversees the ISM survey, said it was too early to gauge whether a sustained slowdown had arrived, and noted that despite attempts to adjust for seasonality, this could just be an August lull. He added that July’s growth rate was “not a sustainable level.”
But many of the details of Tuesday’s report showed steep drops, particularly in key indexes such as business-activity and new orders. Both dropped from near 60 in July to below 52 in August, indicating substantial slowdowns in growth. The employment index edged lower in August to 50.7, from 51.4 in July.
A total of 11 nonmanufacturing industries tracked by ISM reported growth last month, while seven sectors reported contraction.
The broader U.S. economy posted weak growth in the first half of 2016, with gross domestic product expanding at a modest 1.1% annual rate in the second quarter following a first-quarter growth pace of just 0.8%, according to the Commerce Department.
Several economists noted ISM and other surveys in the second quarter had anticipated the slow growth rate, even as other monthly data releases showed the economy gaining strength.
Paul Ashworth of Capital Economics said economists ignored weak survey data at their own peril, noting that his outfit had made that mistake in its second-quarter forecast. For the third quarter, he said, monthly economic data suggest GDP growth will be at least 3% at an annualized rate, while the weighted average of the two ISM indexes is at a level that historically signals GDP growth of only 0.5%.
“This makes us very nervous for the third quarter,” said Mr. Ashworth.
The service sector continued to add jobs in August, according to last week’s monthly employment report from the Labor Department, but at a slower pace than the prior two months. Restaurants and bars added jobs, as did the social assistance industry, professional and technical services, health care, and financial services. Manufacturing and mining shed jobs over the month.
The ISM nonmanufacturing index covers a wide swath of business activity including retail trade, construction and services including health care. It has signaled continuous expansion since early 2010, though growth has slowed over the past year.
A separate measure of service-sector activity from private data provider Markit released earlier Tuesday showed its services purchasing managers index fell to 51.0 in August, a six-month low, from 51.4 in July.
The manufacturing sector had stabilized this spring after months of contraction under pressure from a strong dollar, which makes U.S. exports more expensive for foreign customers, and low oil prices that pinched domestic energy firms. But the ISM’s index ofmanufacturing activity fell into contraction in August, after posting five straight monthly readings above 50, the Institute said in a Sept. 1 report.
