US Services Sector Falls to Lowest Level Since 2020

The U.S. services sector recorded its sharpest slowdown in nearly five years last month, contracting for the first time since the COVID-19 pandemic, according to data released by the Institute for Supply Management (ISM) on Friday.

The ISM’s Services Purchasing Managers’ Index (PMI) dropped by two points to 50.0, signaling stagnation in economic activity across the sector and marking the weakest reading since 2020. The figure also came in below all economists’ expectations, underscoring growing signs of softness in the world’s largest economy.

A reading above 50 indicates expansion, while one below 50 reflects contraction.

The business activity sub-index fell sharply, slipping below 50 for the first time since May 2020,  signaling outright contraction. Meanwhile, the new orders index dropped by 5.6 points to 50.4, erasing most of the gains recorded in the previous month. Export orders also weakened amid softer global demand.

“Overall comments from the sector pointed to moderate or sluggish growth, with more isolated mentions of supply chain delivery challenges,” said Steve Miller, chair of ISM’s Services Business Survey Committee.

“Employment remains in contraction territory due to a mix of delayed hiring efforts and difficulty finding qualified workers,” he added.

The report paints a discouraging picture for U.S. service providers, who represent the bulk of the American economy. The findings follow a separate report earlier this week showing that the manufacturing sector shrank for the seventh consecutive month, reinforcing concerns that the U.S. economy may be losing momentum heading into the final quarter of the year.

According to the survey, ten service industries reported growth in September, led by accommodation and food services, as well as healthcare and social assistance, while seven industries saw declines.

Economists say the data suggest that the Federal Reserve’s high interest rate environment and waning consumer demand are beginning to weigh more visibly on the broader U.S. economy.