Decline in US service sector activity raises economic concerns

WASHINGTON — Growth in the U.S. economy’s vast services sector slowed sharply in September to its lowest point 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 sank 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 later.

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 spill into services industries.

3 key areas weaker

Sales, new orders and employment all weakened 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.

Consumers driving economy even more

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.

In 2016, economists noted, consumer spending helped prevent the economy from slipping into a recession as a sharp drop in oil prices caused production across the manufacturing supply chain to plunge. But Tim Quinlan, a senior economist at Wells Fargo Securities, said the risk of factory weakness spilling over to consumer spending and the services sector is greater in today’s environment as the higher costs of tariffs cut into consumer spending.

“Back in 2016, the drop in gas and fuel prices acted as a bit of a tailwind for consumer spending,” Quinlan said. “This time, you have headwinds from rising goods prices as a result of the tariffs.”