US service firms expand at a slower pace in September as sales plunge, new orders slow

WASHINGTON – Growth at U.S. service companies slowed in September from an eight-year high in August, as sales fell sharply, new orders dipped and hiring weakened.

The Institute of Supply Management says its service-sector index fell to 54.4 in September, down from 58.6 in August. August’s reading was the highest since December 2005. Any reading above 50 indicates expansion.

The report measures growth in service industries, which cover 90 per cent of the workforce, including retail, construction, health care and financial services.

A measure of sales fell seven points to 55.1, indicating much slower growth. And a gauge of hiring also dropped sharply to 52.7 from 57 in August. New orders also dipped, but remained just below 60, suggesting there is plenty of demand in the pipeline.

Still, the sharp drop in sales suggests consumers and businesses pulled back on spending last month. And it comes at a critical time when the government shutdown threatens to weigh on economic growth in the October-December quarter, if it goes beyond a week. Consumer spending drives 70 per cent of economic activity.

Five industries, including hotels and restaurants, arts and entertainment, and health care reported lower business activity. Twelve reported growth, though report doesn’t specify on the industry level if growth was slower than the previous month

The survey’s jump in August was an encouraging sign that growth may be picking up. But other data point to an economy that remains sluggish.

Consumers boosted their spending in August only slightly. On Wednesday, private payroll provider ADP said that hiring by service firms dipped in September from the previous month. The ADP figures usually diverge from the government’s more comprehensive employment report.

The government’s September employment report was scheduled to be released on Friday. But it will now be delayed because of the government shutdown.

The shutdown may depress consumer confidence, particularly if it lasts for more than a week. That could cause Americans to cut back on their spending at service firms such as restaurants, retailers and hotels.

Many economists forecast that growth has slowed to an annual rate of 1.5 per cent to 2 per cent in the July-September quarter, down from a 2.5 per cent annual rate in the April-June quarter.

Growth may rebound to an annual rate of 2.5 per cent to 3 per cent in the current October-December quarter. But that forecast were made before this week’s impasse that shuttered the government. The shutdown could shave about 0.15 percentage points from the fourth quarter figure for each week it lasts.