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Service industries grow at slowest pace in two years

Service industries expanded in January at the slowest pace in nearly two years, raising the risk that persistent weakness in manufacturing is starting to creep into the rest of the U.S. 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 55.1 median forecast in a Bloomberg survey.

The industries that account for about 90 percent 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.

“Manufacturing weakness seems to be spreading to the services side of the economy,” said Thomas Costerg, a senior U.S. economist at Standard Chartered Bank in New York. “There’s definitely no decoupling here. It’s a shaky outlook.”

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.

Ten non-manufacturing industries reported growth in January, led by finance and insurance, real estate and leasing. Eight sectors, including mining, education and transportation, reported contraction. While the majority of respondents had positive comments about conditions, the report showed there is concern about financial markets, global weakness and the effect on sentiment.

“There seems to be a little bit of leveling off,” Anthony Nieves, chairman of the ISM non-manufacturing survey, said on a conference call with reporters after the release. Even though the two reports are exclusive, “there’s a certain overlap” as factories are “suppliers to many of the non-manufacturing companies.”

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.

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 as the share of respondents indicating fewer bookings climbed to a two-year high of 23 percent.

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

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

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