Services Sector Catches Down To Factory Funk As ISM Non-Manufacturing Sinks To Trump-Era Low

It’s probably not a stretch to say that the September read on ISM non-manufacturing was the most hotly-anticipated services PMI in recent memory.

The abysmal read on the US manufacturing sector ISM served up earlier this week was one of the main catalysts for a steep two-day slide in equities both at home and abroad.

Headed into the back half of the week, investors were hoping for evidence that the US service economy is still holding up, even as the global factory slump seems to have made landfall stateside.

Read more: Gut Check Time: Markets On Tenterhooks As October Meltdown Beckons

Optimists will be disappointed.

Although it’s not a total disaster, ISM’s non-manufacturing gauge fell to 52.6 in September. That is the lowest read since August of 2016 or, more to the point, the worst ISM NMI of the Trump era.

The number missed all estimates, printing well below even the most pessimistic forecast from 66 economists. The range was 53.8 to 57.5. The top end of that range now seems laughable.

Under the hood, things don’t look great. Business activity fell to 55.2 compared to 61.5 in the prior month, new orders dropped to 53.7 from 60.3 and employment dove to 50.4 from 53.1 (that’s the lowest since February of 2014).

New export orders rose to 52 from 50.5, while imports fell into contraction. Prices paid and backlogs rose.

The commentary reflects concerns over rising prices, even as the tone is still generally upbeat. To wit:

  • “Tariffs are adding uncertainty to short-term pricing on certain commodities, but suppliers are finding alternate solutions. The bigger impacts appear to be on demand side, which is driving short-term favorability in certain domestic markets.” (Accommodation & Food Services)
  • “Demand has been variable – up one month, down the next. I think customers are watching our input costs and buying ahead on the dips, to the extent that contracts allow.” (Agriculture, Forestry, Fishing & Hunting)
  • “We are very busy right now [and] expect to be so for the next 12 months. We are still very shorthanded with qualified labor.” (Construction)
  • “Gearing up for the fourth quarter of 2019. On track to end the year generally as anticipated, considering interest-rate changes, trade and tariff issues and other economic indicators and trends.” (Finance & Insurance)
  • “We continue with low patient census, which affects our orders and revenue.” (Health Care & Social Assistance)
  • “As employee cost [wages] are increasing in this better economy, it is getting harder to fight price increases on goods and services.” (Information)
  • “Costs are going up, from labor to chemicals to metals.” (Management of Companies & Support Services)
  • “While Chinese tariffs are understandable, they are impacting our supply chain decisions. We are actively pursuing alternate sources for our China-based production. At this point, we have not passed on tariff costs to our customers, but we are evaluating all options.” (Other Services)
  • “Business continues to pick up as we quickly approach Q4. Week by week, we inch closer to a much-anticipated holiday retail season, which requires not only last-minute buys, but a push to fill open positions.” (Retail Trade)

With the manufacturing slump firmly entrenched abroad and starting to bite in the US, and with global growth prospects dimming with each successive trade escalation, the fate of the universe seemingly hangs on the services sector, the US labor market and the American consumer.

Thursday’s data, especially when taken in conjunction with news that the UK services sector is now in contraction, likely won’t be digested with any semblance of alacrity by markets.

Earlier, the final read on IHS Markit’s services and composite PMIs for the US were in line with the flash prints. The services gauge stood at 50.9 in September and the composite at 51. The employment indexes for both are sitting at their lowest levels since 2009.


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