US service sector activity continued to moderate in September

The Institute of Supply Management (ISM) non-manufacturing index eased by 2.1 points to 56.9 in September, posting a second consecutive monthly decline. The print was below the consensus forecast, which called for the index to retreat to 57.5 from 59.0 posted in August.

The retrenchment was broad-based, with seven out of the index's ten subcomponents edging lower in September. New orders subcomponent led the declines falling by the massive 6.7 points. The business activity subcomponent also retreated, declining by 3.7 points to 60.2.

Low commodity prices continued to weigh on the headline index, with the prices paid subcomponent declining by 2.4 points and falling into contractionary territory for the first time since February. 

Not adjusting for seasonality, backlog of orders (-2.0 points), inventory (-3.5 points) and inventory sentiment (-4.0 points) have all deteriorated on the month.

"On the bright side, the employment subcomponent rose 2.3 points to 58.3. Not adjusting for seasonality, both export (+0.5 points) and import orders (+1.5 points) also improved in September", says TD Economics.

Of the 18 non-manufacturing industries surveyed, 13 reported growth (down from 15 the month prior), one reported no change in activity and four reported contraction in activity in September namely: mining; arts, entertainment & recreation; retail trade; and other services.

The U.S. services sector has fared considerably better than its manufacturing counterpart in recent months, however, the second consecutive monthly decline suggests that it too has not been immune to the global growth slowdown and volatility in financial markets. Moreover, business sentiment appears to be impacted by continued uncertainty regarding the federal budget and funding for the federal government. While the index still remains in expansionary territory, recent losses brought the headline 1.2 points below its year-ago level.

While the red-hot pace of service sector expansion seen earlier this year appears to be moderating, most of the industries continue to report growth and the weakness is concentrated among the most externally-exposed nonmanufacturing industries such as mining, trade, and transport. Meanwhile, most other industries should continue to fare well, with activity supported by robust domestic demand which continues to benefit from rising real incomes and employment.

"A gain in employment subcomponent was one bright spot in the overall gloomy report. Despite the fact that the service sector hiring has been relatively weak in the past two payroll reports, services sector remains a key job creator amid the slowdown in the goods-producing industries. A gain in employment subcomponent is therefore encouraging, suggesting that service sector companies intent to continue to expand their payrolls in the near term as some of the global and domestic uncertainty dissipates. Extra help may come from the government sector, where hiring has been particularly robust, with 115k new jobs added to public sector payrolls over the past four months", added TD Economics.