US services gauge falls on weakest business activity since 2020

The business activity index, which is similar to the ISM’s factory output gauge, fell more than five points and into contraction territory for the first time since May 2020.

The US service sector stalled in September as business activity shrank for the first time since the pandemic and orders barely expanded.

The Institute for Supply Management’s index of services dropped 2 points to 50, a level that indicates stagnation, the group said Friday. The figure was weaker than all estimates in a Bloomberg survey of economists.

The business activity index, which is similar to the ISM’s factory output gauge, fell more than five points and into contraction territory for the first time since May 2020.

The measure of new orders dropped 5.6 points to 50.4, erasing almost all of the prior month’s gain. Export orders also fell.

Industry “commentary in general indicated moderate or weak growth, with more isolated observations of supplier delivery challenges,” Steve Miller, chair of the ISM Services Business Survey Committee, said in a statement. “Employment continues to be in contraction territory, thanks to a combination of delayed hiring efforts and difficulty finding qualified staff.

The disappointing snapshot of service providers, which make up the largest part of the economy, follows a report earlier this week showing a seventh month of contraction in manufacturing.

Ten services industries reported growth in September, led by accommodation and food services, as well as health care and social assistance. Seven industries contracted.

Services Employment

Softer orders and business activity coincided with a fourth month of shrinking employment, albeit at a slower pace in September. Six industries reported an increase in employment, while eight noted a decrease.

Stronger bookings and sales are likely needed to encourage companies to step up hiring. Economists and policymakers will be relying more on private reports such as the ISM survey for insights into the job market and broader economy in the absence of official data because of the US government shutdown.

Delivery times also lengthened in September in the wake of a jump in orders a month earlier. The ISM index of supplier deliveries rose 2.3 points to the highest level since February. A measure of order backlogs, which last month dropped to the lowest level in 16 years, rebounded but remained in contraction territory.

The group’s prices-paid index ticked up to 69.4, one of the highest in three years.

Select ISM Industry Comments

“We are beginning to see the impact of the tariffs impact our business, particularly for food products from India, China, and Southeast Asia, coffee from South America, and apparel and electronics from Asia. Our year-over-year cost increases are getting progressively greater.” — Accommodation & Food Services

“The pace of housing starts has been stagnant to slightly declining, as we head out of the summer building season.” — Construction

“We are still facing significant supply chain challenges, especially for advanced semiconductors and power components, with lead times remaining extended. Price pressures are still present but have not worsened compared to the previous month.” — Information

“Client demand in professional services remains steady, though decision-making timelines are lengthening due to continued economic uncertainty and interest-rate concerns.” — Professional, Scientific & Technical Services

“The overall housing market remains stagnant, which has forced our company to be hyper-vigilant about costs.” — Real Estate, Rental & Leasing

“Costs overall have stabilized, and we’ve not seen any interruptions in sourcing or shipments.” — Retail Trade

“Business conditions continue to soften, even in markets that have historically been more resilient. Demand is simply weak.” — Wholesale Trade

Meanwhile, a measure of stockpiles dropped to the lowest level since the start of this year even as a related gauge showed a slight pickup in concerns inventories are too high.