U.S. service sector activity slows sharply in August, points towards slight slippage in economic momentum

The U.S. ISM nonmanufacturing index dropped more than expectations in August. The index fell to 51.4 in the month from 55.5 in July. The consensus expectations were for a drop to 54.5. Most of the fall was due to business activity index, which reached 51.8 in August after a strong 59.3 in July.

New orders also softened significantly, with the index falling to 51.4 in August from 60.3 in July. Significantly, the severe drop in both indexes was mainly driven by fewer companies reporting higher activity and an increase in those who viewed business conditions as unchanged. The number of companies reporting lower activity moved up slightly and is quite in its recent range.

Matching the decline in the pace of job growths in the nonfarm payroll report last week, the employment index dropped to 50.7 from 51.4. The ISM nonmanufacturing report affirms the view that the overall weakness in August payrolls was probably in line with the underlying pace of activity and that it was not driven mainly by statistical noise, noted Barclays in a research report.

In all, the ISM nonmanufacturing report shows that service sector activity continues to expand, although at a quite weaker pace than earlier in the summer, according to Barclays. Even if the figure is quite weak and still in line with softer services sector growth, the stability in the lower activity is comforting. In the run-up to the past two recessions, companies looking at lower activity led to the change in index. Demand for labor in the service sector has yet to rebound significantly from its year-to-date weakness, said Barclays.

While certain reduction in the index was anticipated, the severe deceleration in service sector activity pointed towards certain fall in economic momentum, said TD Economics in a research note. It would seem at this point that the U.S. consumer is the only resilient support following the strong growth in income and consumption via July. But a deceleration in international trade and contraction in trade and transportation sectors implies that uncertain and a weak global backdrop continue to be challenges for domestic growth, added TD Economics.