US ISM services index drops more than expected in August

Growth in the US economy’s services sector hit a six-year low, according to figures from the Institute for Supply Management (ISM).

The ISM services index fell to 51.4 in August from 55.5 the month before, missing expectations for a reading of 55.0 and hitting its lowest level since February 2010. A reading above 50 indicates expansion.

The non-manufacturing business activity index dropped to 51.8 from July’s 59.3, with the new orders index down to 51.4 from 60.3.
Meanwhile, the employment index fell to 50.7 in August from July’s 51.4.

A gauge linked to firm´s order backlogs slipped from a print of 51.0 to 49.5.

Eleven industry groups reported growth in August versus seven who said activity declined.

Included among the latter were: Other Services; Mining; Agriculture, Forestry, Fishing & Hunting; Transportation & Warehousing; Wholesale Trade; Retail Trade; and Arts, Entertainment & Recreation.

Naeem Aslam, chief market analyst at Think Markets, said: “When you see the ISM non-manufacturing number dropping like this, it shakes the floor on which traders are building the hopes that the Fed could increase the interest rate. A few more readings like this and you can say goodbye to interest rate hikes.

“The US dollar dropped on the back of this and traders are taking profits off the table. This is good news if you have a position in gold, as the drop in the US rate hike expectations will continue to push the gold price higher.”

"Although still a weak number and still consistent with softer services sector growth, the stability in those reporting lower activity is reassuring. In the run-up to the past two recessions, firms seeing lower activity drove the change in the index. Labor demand in the service sector has yet to bounce back meaningfully from its year-to-date softness," said Rob Martin at Barclays Research.

"This is just as big a mystery as the drop in the manufacturing index. The surveys are completely separate, with different seasonals, and their m/m movements are uncorrelated. But we have to be suspicious about out-of-the-blue declines in both in the same month, especially when the Markit PMIs, which tend to follow similar trends, were little changed," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

As of 1535 BST the yield on the benchmark 10-year US Treasury note was down by five basis points to 1.5579%.