US service sector slides to 3-year low in September

[WASHINGTON] American services industries, the main driver of the world's largest economy, deteriorated unexpectedly in September, falling to the weakest level in three years, according to an industry survey released Thursday.

The bad news hit Wall Street immediately, exacerbating recession fears, but stocks soon staged a partial recovery.

The Institute for Supply Management (ISM) said its non-manufacturing index slid 3.8 points to 52.6, as business activity, new orders, employment and imports all fell - pointing to weaker general demand.

Economists had expected a smaller decline in the index and though the sector is still growing, the soft reading shows a slowdown that could point to weaker GDP growth at the end of the third quarter.

While any reading above 50 indicates growth, the September level was the lowest for the ISM services index since August of 2016.

Earlier this week, another ISM survey showed the smaller manufacturing sector contracted for the second straight month, hitting its lowest level since the Great Recession a decade ago.

Economists say data now clearly show US President Donald Trump's trade wars and the economic slowdown around the globe are washing back onto US shores.

'WORSE THAN IT LOOKS'

Anthony Nieves, chair of ISM's services sector survey, said the coming months will be crucial to determining whether the manufacturing recession will contaminate the rest of the economy.

"If we start seeing continued contraction in that sector, it's a good indicator of what might happen down the road," he told reporters.

The survey showed companies were increasingly chastened by the trade war, and "As things get a little dicey, companies tend to pull back a bit, tighten their purse strings", he said.

But he noted that the dip in the hiring index was mostly tied to the lack of available talent amid the current labour shortage.

Four services industries - education, real estate, wholesale trade, rental and leasing, and "other" - reported contraction, while 13 reported growth.

"Costs are going up, from labor to chemicals to metals," said a respondent in management and support services, reflecting multiple comments about higher prices due to rising wages and tariffs.

Ian Shepherdson of Pantheon Macroeconomics said the result was "much worse than it looks", as it suggested companies expected a drop-off in consumer spending due to Trump's looming tariff increases.

As a result, monthly job creation could fall to around 50,000 per month toward the end of the year, he said in a client note.

"The bad news is that the survey has overstated job growth for most of this year, and if that persists, then zero payroll readings are not far off."

AFP