The U.S. nonmanufacturing sector continued to grow in September but at a slower pace than expected, reaching its lowest level in three years, new data from the Institute for Supply Management showed.
Amid tariff and labor market concerns, the ISM's seasonally adjusted nonmanufacturing index fell to 52.6% in September from 56.4% in August, the lowest since August 2016. A reading above 50% indicates expansion.
The consensus estimate of economists polled by Econoday was for an index reading of 55.5%.
Indexes for business activity or production and for new orders dropped by 6.3 percentage points and 6.6 percentage points, respectively. The employment index fell by 2.7 percentage points.
"The respondents are mostly concerned about tariffs, labor resources and the direction of the economy," said Anthony Nieves, chair of the ISM nonmanufacturing business survey committee.
Survey data released earlier this week showed that the U.S. manufacturing sector contracted further in September and fell to its lowest level in 10 years.
The latest survey data will keep the pressure on the U.S. Federal Reserve to ease monetary policy further, according to James Knightley, chief international economist at ING. "The risks are increasingly skewed towards more aggressive action," he said in a research note.
Markets are now pricing in a nearly 93% probability that the Fed will cut rates again toward the end of October, compared with an approximately 49% chance a week ago.
Separately, IHS Markit reported that its services business activity index registered 50.9 for September, up from 50.7 in August, the weakest increase in output for more than three years.
New business growth in the services sector also hit its slowest pace since October 2009, IHS Markit said, while employment contracted for the first time since February 2010.
IHS Markit's composite PMI output index for the U.S., a weighted average of manufacturing and services business activity, rose to 51.0 in September from 50.7 the prior month — one of the weakest upturns in private-sector output in over three years.
"The surveys are consistent with the economy growing at a 1.5% annualized rate in the third quarter, with forward-looking indicators suggesting further momentum could be lost in the fourth quarter," said Chris Williamson, chief business economist at IHS Markit.
