Services Sector Growth Slowed in August

There was good news and bad news Friday regarding the economy: The nation unexpectedly added 67,000 private sector jobs in August, but the services sector index disappointed, falling almost three points to 51.5, the Institute for Supply Management announced.

A Bloomberg survey had expected the services index to dip to 53.0 in August from 54.3 in July. The index was at 53.8 and 55.4 in June and May, respectively. ISM services index readings above 50 signal an expansion; below 50, a contraction.

Most of the index's components continued to signal growth, but at a slower pace. The closely watched business activity component fell to 54.4 in August from 57.4 in July. The new orders component plunged to 52.4 from 56.7.

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However, perhaps most concerning, the employment component fell to 48.2 from 50.9 -- a level that indicates employment is contracting. The employment component has meandered for the past two months and if that sideways action persists or the component deteriorates, that would be a danger sign for the U.S. economy, due to the large percentage of U.S. GDP that the services sector accounts for. The U.S. economy needs job growth in its huge services sector to lower the nation's high 9.6% unemployment rate.

On the positive side, the prices-paid component surged to 60.3 in August from 52.7 in July, and that provides further evidence of price firming -- an encouraging development, given economists' growing concerns about deflation.

Service Companies: Mixed Evaluation Of Economy

Services sector survey respondents' comments in August were mixed about business conditions and regarding the state of the U.S. economy, in general.
  • "In general, sales have increased slightly compared to the same period last year. However, [sales] are still significantly less than the same period two years ago" (public administration sector).
  • "Continuing to show signs of positive growth" (construction sector).
  • "Business is pretty stagnant; starting to see price erosion in our selling markets" (agriculture, forestry, fishing and hunting sector).
  • "Due to general economic conditions, we are finding more aggressive pricing and deals to win business in the competitive marketplace" (health care and social assistance sector).
  • "We are anticipating a slowdown in the third and fourth quarter of this year, with no signs of recovery for the next few quarters" (professional, scientific and technical services sector).
Economists, business executives, and policy makers monitor the ISM services index due to the large role services play in the U.S. economy and trade, currently about 65% to 70% of the U.S. economy. The non-manufacturing survey polls about 400 firms in 60 sectors.

August's services report was a mild disappointment laced with conflicting data. On the one hand, the top-line statistic and several key components still indicate a growing sector. On the other hand, the employment component's second dip in three months below the 50 expansion/contraction demarcation line is a concern.

Simply, the economy needs a robust services sector featuring substantial, continual emplyment growth to offset sluggish job growth in housing, financial services, and other sectors undergoing recession-related structural changes -- a major reason economists and policy makers will keep a close eye on the component in the months and quarters ahead.
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