US services growth falls to 6-year low

Posted on September 6, 2016

The news on the services sector, which accounts for the bulk of US output and employment, ricocheted across the financial markets Photographer: Jason Alden/Bloomberg©Bloomberg

Growth in the vast US services sector in August fell to the lowest level since early 2010, adding fuel to concerns sparked by an unexpected factory slowdown.

The Institute for Supply Management’s non-manufacturing purchasing managers’ index dropped to 51.4 last month, from 55.5 the month before. Economists had expected a slimmer fall to 54.9. Readings above 50 point to expansion, while those below indicate contraction.

    The weakness was broad-based, with expansion in business activity and new orders sinking. Inventories also slumped into contraction territory after rising in the previous month. A decline in inventories among US groups weighed heavily on growth in the second quarter, but some Wall Street banks had anticipated a bounceback.

    The data released on Tuesday come just days after another report from the ISM showed the factory sector unexpectedly halted a five-month expansion in August.

    The news on the services sector, which accounts for the bulk of US output and employment, ricocheted across the financial markets as expectations that the Federal Reserve might increase interest rates in September dimmed.

    The implied odds of a September rate rise dropped to 20 per cent on Tuesday, from 32 per cent last Friday. Meanwhile, the US dollar fell 0.8 per cent against a basket of six global currencies. The yield on the policy-sensitive two-year Treasury note, which moves in the opposite direction to its price, declined nearly 4 basis points to 0.746 per cent.

    The data are “discouraging” and something “the Fed is not going to be happy with”, said Ward McCarthy, chief financial economist at Jefferies. However, he pointed out that “the weak print is not a cause for alarm just yet” given that growth at the very least continued through what is generally a slow season.

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