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US non-manufacturing sectors undershoot expectations

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NEW YORK, NY - OCTOBER 26: An employee helps a customer use a Dell computer at Microsoft's first flagship store on Fifth Avenue on October 26, 2015 in New York City. Hundreds of eager customers waited outside to celebrate the opening of the three-story store that sells everything from laptops to tablets to Xboxes and video games. (Photo by Bryan Thomas/Getty Images)

The US’s non-manufacturing sector severely undershot expectations last month, survey data showed today, continuing the trend of bad economic news from the world’s biggest economy.

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The Institute for Supply Management’s (ISM) non-manufacturing purchasing managers’ index (PMI) – a gauge of the health of the sectors – fell to a three-year low of 52.6 in September.

The figure was down from 56.4 in August and well below expectations of 55. A score of over 50 indicates contraction, however, meaning the US’s non-manufacturing sector – which includes retail and services – is still expanding.

“The non-manufacturing sector pulled back after reflecting strong growth in August,” said Anthony Nieves, chair of the ISM. “The respondents are mostly concerned about tariffs, labour resources and the direction of the economy.”

Serious fears have been raised over the health of the US economy this week. On Tuesday, survey data showed the manufacturing sector suffered its worst month since the financial crisis in September.

The US-China trade war and a general global economic slowdown have hit US factories. Today’s survey data shows that the non-manufacturing sector has also been affected.

Nieves said that the past relationship between the non-manufacturing PMI and the overall economy suggests that GDP is growing at an annual rate of 1.4 per cent. This marks a significant slowdown from annualised first-quarter growth of 3.1 per cent.

Michael Pearce, senior US eocnomist at Capital Economics, said: “Based on the incoming hard economic data, we still think third quarter GDP growth was 1.5 per cent annualised.” 

“But the surveys support our view that economic growth is likely to slow further over the final three months of the year

He said that should be enough to prompt the US Federal Reserve to make another 0.25 percentage point interest rate cut at its next meeting, taking the interest rate target down to 1.5 to 1.75 per cent.

Read more: US factories suffer worst month since 2009 – and Trump blames the Fed

“We suspect the Fed will resist calls for much deeper rate cuts until there were clearer evidence the economy was at serious risk of falling into recession.”

(Image credit: Getty)