US services sector activity slows to 6-1/2 year low

[NEW YORK] US services sector activity hit a 6-1/2 year-low in August amid sharp drops in production and orders, pointing to slowing economic growth that could further diminish prospects for an interest rate hike from the Federal Reserve this month.

The Institute for Supply Management (ISM) said on Tuesday its non-manufacturing activity index fell 4.1 percentage points to a reading of 51.4, the lowest since Feb 2010.

The drop from July was the largest monthly decrease since the 2008 financial crisis, with the ISM saying a majority of companies had noted a slowing in their level of business.

A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of US economic activity. "For a data-dependent Fed, it may be difficult to raise rates in September after all," said Chris Low, chief economist at FTN Financial in New York.

The report came on the heels of data last week showing a slowdown in job growth in August and a contraction in factory activity, which led many economists to expect the Fed would keep rates unchanged at its upcoming Sept 20-21 policy meeting.

The US central bank lifted its benchmark overnight interest rate at the end of last year for the first time in nearly a decade, but has held it steady since amid concerns over persistently low inflation.

The dollar dropped against a basket of currencies on Tuesday's data, while prices for US government debt rose. US stocks traded marginally lower.

Economists said while the ISM surveys did not directly feed into the calculation of gross domestic product, the weak August readings suggested economic growth could be slowing.

The Atlanta Fed forecasts GDP rising at a 3.5 per cent annual rate in the third quarter. The US economy grew 1.0 per cent in the first half of the year. "This makes us very nervous for the third quarter. Growth might still be strong. There are good reasons to believe it will be, such as the rebound in mining-related investment and the strength of exports," said Paul Ashworth, chief US economist at Capital Economics in New York.

Last month's sharp slowdown in services industry activity reflected a 7.5 percentage points decline in the production subindex, the largest drop since November 2008, when the financial crisis was roiling the global economy.

Activity was also weighed down by decreases in employment and new orders measures. Inventories at services industries contracted last month as did backlog orders and new export orders.

The ISM said 11 industries, including utilities, real estate, finance and insurance, health care & social assistance, information and professional, scientific and technical services reported growth last month.

The seven industries reporting contraction included transportation and warehousing, wholesale trade, retail trade and arts, entertainment and recreation.

Retailers described the business environment as having"softened a bit over the last month," while respondents in professional, scientific & technical services said they were still recovering from the renewable energy market downturn.

REUTERS