Drop in U.S. service sector activity raises economic concerns
Washington – Growth in the U.S. services sector slowed sharply in September to its lowest level in three years, suggesting that the Trump administration’s trade conflicts and rising uncertainty are weakening the bulk of the economy.
The Institute for Supply Management, an association of purchasing managers, said Thursday that its non-manufacturing index slipped to 52.6 from 56.4 in August. Readings above 50 signal growth, but September’s figures are the lowest since August 2016.
The report renewed worries of an economic slowdown and caused alarm among stock traders. The Dow Jones Industrial Average fell more than 200 points immediately after the ISM released its report at 10 a.m. Eastern time, before recovering all its losses by late-morning.
The downshift in the services sector, which accounts for more than two-thirds of U.S. economic activity, coincides with a U.S.-China trade war that has been squeezing American manufacturers. The services sector has so far mainly weathered those pressures. But slower global growth, rising trade tensions and persistent uncertainties may now be spilling into services industries.
Sales, new orders and employment all slowed last month, and companies that were surveyed by ISM expressed concerns about tariffs. Economists say a drop in the employment measure of ISM’s index to 50.4, its lowest level since February 2014, is a particular cause for concern.
“The most concerning part of the survey was on the employment side, where the index dropped from 53.1 to 50.4, just barely indicating growth,” a note from Contingent Macro Research said.
Survey respondents suggested that a tightening workforce was intensifying competition for qualified employees. But Ben May, an economist at Oxford Economics, said that weaker employment was also likely due, at least in part, to heightened economic uncertainty and global manufacturing weakness. May added that this would likely spill over to hurt other areas in the U.S. economy.
“If softer and more uncertain economic prospects are the cause of weaker labor demand, any employment downturn is more likely to be accompanied by weaker consumer sentiment and slower wage and investment,” May said in a research note.
Economic growth in recent months has been driven, even more than usual, by consumer spending as businesses have slowed their expansion and investment because of Trump’s trade conflicts. But with the administration’s tariffs beginning to hit consumer goods from China and Europe, the forces that are hammering manufacturing are threatening to weaken household spending, the U.S. economy’s primary fuel.
“The next few months will be a test of the U.S. consumers’ confidence in the face of recession-talk headlines, the next round of tariffs impacting consumer goods, financial market volatility and the latest political uncertainty in Washington,” said Ksenia Bushmeneva, an economist at TD Economics.