U.S. Services Join Factories With Slowest Growth Since 2016

(Bloomberg) -- A gauge of service industries declined in July to an almost three-year low as orders continued to cool, indicating a sluggish start to the third quarter for the biggest part of the economy.

The non-manufacturing index fell to 53.7, the weakest since August 2016 and well below the median forecast of economists, data from the Institute for Supply Management showed Monday. While still expanding, the purchasing managers' group's measures of orders and business activity were also the lowest since mid-2016. Readings above 50 indicate growth.

Key Takeaways

The July decline follows the ISM's report last week that showed a fourth straight month of slower growth in manufacturing. Together, the figures point to the growing economic risks that Federal Reserve officials highlighted when they reduced interest rates last week for the first time in a decade.
While sluggish global economies and trade friction between the U.S. and China have been more pronounced in manufacturing, the concern at the Fed is that the weakness will extend to services, which account for about 90% of the economy and include industries such as retail, health care, and construction.
Among other categories in the ISM's non-manufacturing report, a measure of inventories suffered the biggest decline since December.
An index of export orders also retreated as overseas customers cut back on demand for U.S. services and merchandise. President Donald Trump escalated the trade conflict last week, announcing a 10% tariff on an additional $300 billion in Chinese goods which include consumer items like laptops and clothing that will have a more direct impact on U.S. retailers.

Official's View

“We've seen the overall economy slowing," Anthony Nieves, chairman of the non-manufacturing survey, said on a conference call. At the same time, “none of the gauges are contracting."

Respondents “are concerned about the tariffs," he said. The latest tariff threats “could definitely could effect the psyche, the confidence. Even though the report has been soft this month, other data suggests we have high consumer confidence, unemployment low, wages up -- all of this could be impacted."

Get More

The business activity measure slumped 5.1 points to 53.1, also the lowest since August 2016.
Export orders declined to the lowest since March, according to the ISM index. That suggests the U.S. trade deficit, which narrowed in June by less than forecast, will be hard- pressed to improve.
The ISM's non-manufacturing employment index was about the only bright spot in the report, recouping only a portion of the prior month's decline.
A gauge of prices paid fell to 56.5 from 58.9, the biggest drop in three months as tepid global demand reduces price pressures.
The ISM's measure of order backlogs retreated, suggesting companies are having an easier time fulfilling orders.
The median forecast in a Bloomberg survey of economists was 55.5, with estimates ranging from 53.3 to 58.3.