US services sector activity hits six-year low, casts shadow on economy

US services sector activity slowed to a 6½-year low in August amid sharp drops in production and orders, pointing to slowing economic growth that further diminished prospects for an interest-rate hike from the Federal Reserve this month.

Tuesday’s downbeat report from the Institute for Supply Management (ISM) came on the heels of data last week showing a slowdown in job growth in August, a contraction in factory activity and weak automobile sales.

"It is beginning to look as if the economy went on vacation in August," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

‘Troubling’

“The August data are troubling and they have to concern the Fed. There is no compelling reason for the Fed to raise rates in two weeks.”

The ISM said its non-manufacturing activity index fell 4.1 percentage points to a reading of 51.4, the lowest since February 2010. The drop from July was the largest monthly fall since the 2008 financial crisis, with the ISM saying a majority of companies had noted a slowing in their level of business.

A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of US economic activity.

After the report, interest rate futures were pricing in a 15 per cent probability of a rate increase at the Fed’s upcoming September 20th-21th meeting. The odds for a December rate hike were even.

Benchmark

The US central bank lifted its benchmark overnight interest rate at the end of last year for the first time in nearly a decade, but has held it steady since amid concerns over persistently low inflation.

The dollar dropped against a basket of currencies on Tuesday’s data, while prices for US government debt rose. US stocks were trading higher.

The ISM reported last week that factory activity contracted in August for the first time in six months. The ISM manufacturing index, however, remains above the threshold associated with a recession.

Economists said while the ISM surveys did not directly feed into the calculation of gross domestic product, the weak August readings suggested economic growth could be slowing.

– (Reuters)