Service industries in US expand at slowest pace since 2014

FEB 3, 201611:20 PM

[WASHINGTON] Service industries expanded in January at the slowest pace in nearly two years, raising the risk that persistent weakness in manufacturing is starting to spread to the rest of the US economy.

The Institute for Supply Management's non-manufacturing index fell last month to 53.5, the lowest since February 2014, from 55.8, the Tempe, Arizona-based group's report showed on Wednesday. Readings above 50 signal expansion. The result was less than the median forecast in a Bloomberg survey.

The industries that account for about 90 per cent of the economy may be adjusting expectations after consumers tempered spending and businesses cut back on investment in the fourth quarter. While service providers can be more insulated than their factory counterparts from sluggishness overseas and a stronger dollar, the January retreat reflected a sudden shift lower in sentiment about business activity.

"We're seeing signs of a slower US economy," Jennifer Lee, a senior economist at BMO Capital Markets in Toronto, said before the report. "We had a weak hand-off to the first quarter. Consumers are still spending, but the pace has slowed." The ISM non-manufacturing survey covers an array of industries including utilities, retailing, and health care, in addition to construction and agriculture.

The group's factory survey released on Feb 1 showed manufacturing shrank for a fourth straight month. The 48.2 reading for the index in January was little changed from 48 a month earlier, which was the weakest since June 2009.

Details of the services survey showed the business activity index dropped to 53.9 from 59.5 in the prior month, marking the biggest decrease since November 2008. The measure parallels the ISM's factory production gauge.

Weaker Employment The services employment index fell to 52.1 in January, matching the lowest since April 2014, from 56.3 the prior month.

The new orders measure decreased to 56.5 from 58.9, while a measure of supplier deliveries climbed to 51.5 from 48.5.

The index of prices paid dropped to 46.4, the first contraction in three months, from 51.

The economy grew at a 0.7 per cent annualized rate in the fourth quarter, Commerce Department data showed last week. Consumer spending, which accounts for about 70 per cent of the economy, moderated to a 2.2 per cent pace, while business investment fell at a 1.8 per cent rate, the first drop since the third quarter of 2012.

Sustained job creation and lower fuel bills have the potential to spur demand. At the same time, wage growth has been sluggish and Americans have been intent on boosting savings rather than ramping up purchases.

Housing, which is included in the ISM services report, is also benefiting from strong hiring and low mortgage rates that are boosting purchases, though bigger advances in income would help accelerate sales this year.

BLOOMBERG