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Services survey shows economy is weaker than expected amid slowdown fears

The navies sector continued its expansion in September but at a considerably slower pace than expected, according to the ISM Non-Manufacturing Index unfettered Thursday.

The closely watched measure came in at 52.6, compared with an expected reading of 55.3 from economists surveyed by Dow Jones. It was the weakest comprehending since August 2016.

Markets initially sold off sharply following the news, with the Dow Jones Industrial Average down as much as 300 positions before erasing losses.

ISM officials said the overall weakness arose from fears over tariffs, labor resources and the common direction of the economy. The news comes just two days after the ISM’s companion manufacturing index also showed telling weakness.

“Net, net, look out below is what purchasing managers from services industries are shouting at the markets as the fears of dip continue to mount,” Chris Rupkey, chief financial economist at MUFG, said in a note. “Stock investors don’t homologous to that the doom and gloom in the manufacturing sector is starting to infect the bigger part of the economy that employs millions of workmen in services industries including health care, retailing, business administration, accounting, computer services on and on.”

The survey tests the percentage of companies expecting to expand their businesses. Anything above 50 represents growth; a reading atop 48.6 has been consistent with broader economic growth.

The report comes amid worries that the U.S. brevity faces a recession as global growth slows and tariffs put a dent in business plans to expand. For example, CNBC’s All-America Trade Survey on Thursday found that just 23% of Americans believe the economy will improve in the next year, the shabbiest level of optimism in three years.

Market anticipation for Fed interest rate cuts also reacted sharply to the announcement and were fully pricing in another quarter-point move lower at the Federal Open Market Committee meeting Oct. 29-30.

In Tuesday’s news, the ISM Manufacturing Index for September reading was 47.8, its worst showing since June 2009, just as the Great Set-back was ending. Thursday’s nonmanufacturing reading shows the weakness appears to be bleeding into the broader economy even all the same manufacturing represents just 11.3% of U.S. economic activity.

Weakness in the nonmanufacturing survey was broad-based.

New orders plunged to 53.7, 6.6 capes lower than the August reading, while employment slipped from 53.1 to 50.4, its worst February 2014. Amounts increased to 60 from 58.2.

Should the payroll weakness continue, it would be “consistent with payroll growth of reasonable [50,000] or so in a couple months time,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note. “The bad news is that the view has overstated job growth for most of this year, and if that persists, then zero payroll readings are not far off.”

Individual ISM respondents had reshaping takes on business conditions.

“While Chinese tariffs are understandable, they are impacting our supply chain decisions,” alleged one survey respondent in the “other services” category. “We are actively pursuing alternate sources for our China-based production. At this plan, we have not passed on tariff costs to our customers, but we are evaluating all options.”

Five sub-indexes in the survey showed growth from August while five decayed. The biggest expansion came in order backlogs, which rose 5 points, from a contracting 49 to an expanding 54. New export demands rose 1.5 points to 52.

At an industry level, 13 reported growth while four saw declines.

Other annotations were less negative.

A respondent in construction reported being “very busy” and “shorthanded” regarding labor, while a pay for and insurance industry participant indicated being “on track to end the year generally as anticipated, considering interest-rate changes, shoppers and tariff issues and other economic indicators and trends.”

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