US Services Sector Activity Flatline in September

Source Credit : Reuters

U.S. services sector activity stalled in September amid a sharp slowdown in new orders, while subdued employment added to mounting evidence of sluggish labor market conditions because of sagging demand and supply of workers.

The survey from the Institute for Supply Management (ISM) on Friday also showed a measure of prices paid by services businesses for inputs hovering near three-year highs last month.

Signs of stagnating activity and elevated services inflation could complicate matters for the Federal Reserve, with financial markets expecting another interest rate cut this month.

The survey assumed more importance than usual after a lapse in funding forced a shutdownof the U.S. government early this week and delayed the release of the closely watched monthly employment report for September. It was the first time since the 2013 government shutdown that the employment report, crucial for decision-making by officials at the U.S. central bank, businesses and households, was not published.

President Donald Trump's aggressive, sweeping tariffs on imports have eroded business sentiment, constraining activity across the services and manufacturing sectors.

"This is an economy that is in suspended animation, as businesses wait for the Trump administration to settle on a clear and predictable policy for tariffs and immigration," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. "Once policy-related uncertainty recedes, I expect business activity to pick back up."

The ISM said its nonmanufacturing purchasing managers index (PMI) fell to 50 last month, the breakeven point, from 52.0 in August. Economists polled by Reuters had forecast the services PMI easing to 51.7. The services sector accounts for more than two-thirds of U.S. economic activity.

Ten service industries, including public administration, wholesale trade and utilities reported growth. Among seven that contracted were mining, construction and retail trade.

Some businesses in the accommodation and food sector said import duties were starting to have an impact, "particularly for food products from India, China and Southeast Asia, coffee from South America," adding "our year-over-year cost increases are getting progressively greater."

Construction businesses reported "tariffs are beginning to be passed through on materials that are metal based." Utilities providers said "we've had more tariff charges last month than in previous months." For other businesses like those in wholesale trade, "demand is simply weak."

The survey's measure of new orders received by services businesses dropped to 50.4 from 56.0 in August. Backlog orders

were depressed for the seventh consecutive month, while export demand remained subdued.

Stocks on Wall Street were trading higher. The dollar dipped against a basket of currencies. U.S. Treasury yields rose.