US Services Sector Stalls as Key Economic Gauge Hits 2020 Low
The ISM Services PMI unexpectedly fell to the breakeven point of 50, missing market forecasts and raising new questions about US economic momentum.
Growth in the vast US services sector ground to a halt in September, as a key industry gauge fell to its weakest level since the pandemic-driven downturn in 2020. The Institute for Supply Management (ISM) reported its services Purchasing Managers' Index (PMI) registered 50 last month, a sharp drop from August and below economists' expectations.
A reading of 50 is the exact breakeven point between expansion and contraction, signaling a significant loss of momentum for the sector that employs the majority of Americans. The details of the painted a concerning picture, with the Business Activity Index falling into contraction territory for the first time since May 2020 and a steep decline in the New Orders Index.
The unexpected slowdown comes at a sensitive time for the economy, with a partial federal government shutdown pausing the release of other key data points. This has forced investors and policymakers to place greater weight on independent surveys like the ISM's. While hiring challenges continued, with the Employment Index contracting for a fourth straight month, , complicating the outlook for inflation.
Despite the downbeat economic signal, which would typically pressure equities, the market reaction was counterintuitive. Wall Street saw a 'risk-on' rally following the release, with major stock indices climbing. This response suggests some investors may be interpreting the weak data as a sign that the Federal Reserve will have less room to continue raising interest rates. Nonetheless, the adds a significant new variable to an already uncertain economic outlook.