By Lucia Mutikani
WASHINGTON (Reuters) - U.S. services sector activity slowed to a three-year low in September amid rising concerns about tariffs, suggesting that trade tensions were spilling over to the broader economy.
Coming on the heels of news this week that manufacturing activity plunged to a more than 10-year trough in September, the survey from the Institute for Supply Management (ISM) on Thursday increased the risks of a recession. For now, a solid labour market is keeping the economy on a moderate growth path.
The raft of weak data could prompt the Federal Reserve to cut interest rates again this month to keep the longest economic expansion in history, now in its 11th year, on track. The U.S. central bank cut rates last month after reducing borrowing costs in July for the first time since the 2008 financial crisis.
"This downturn is starting to spread and that means the tea leaf readers at the Fed are going to be teeing up a third rate cut this year when they next meet again at the end of this month," said Chris Rupkey, chief economist at MUFG in New York.
The ISM said its non-manufacturing activity index fell to a reading of 52.6 in September, the lowest since August 2016, from 56.4 in August. A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of U.S. economic activity. Economists polled by Reuters had forecast the index falling to 55.1 in September.
The ISM reported on Tuesday that its measure of national manufacturing activity plunged in September to its lowest level since June 2009, when the Great Recession was ending.
It said services industry businesses "are mostly concerned about tariffs, labour resources and the direction of the economy." The ISM said 13 industries, including public administration, and finance and insurance, reported growth last month. Educational services and other services reported a contraction.
The dollar fell against a basket of currencies on the services industry data, while U.S. Treasury prices rallied. Stocks on Wall Street were trading higher on expectations of a rate cut this month.
September's drop in services sector activity reflected declines in measures of production and new orders, which tumbled 6.6 points to a reading of 53.7, a three-year low. But order backlogs increased as did new bookings for exports, offering hope that activity in the sector could rebound.
A gauge of services industry employment fell to 50.4 last month, the lowest reading since February 2014, from 53.1 in August. The ISM said some businesses reported that the "number of new employees starting to level off," and others said "tightening workforce is leading to a more competitive market for qualified potential employees."
This together with a sharp decline in the ISM's measure of manufacturing employment to more than a 3-1/2-year low last month bolstered economists' expectations that the government's closely watched employment report on Friday would show another month of moderate job growth in September.
According to a Reuters survey of economists, nonfarm payrolls probably increased by 145,000 jobs last month after rising by 130,000 in August. Job gains have averaged 158,000 per month this year, still above the roughly 100,000 needed each month to keep up with growth in the working-age population.
The unemployment rate is forecast unchanged at 3.7% for a fourth straight month in September.
SOLID LABOUR MARKET
Slowing job growth could curb consumer spending, which has been the economy's main growth engine.
"Yes, the economy is slowing," said Joel Naroff, chief economist at Naroff Economic Advisors, in Holland, Pennsylvania. "No, it is not in recession and there is no reason to believe it will go into the red this year."
The weak manufacturing and services sector surveys have prompted economists to slash their gross domestic product growth estimates for the third quarter to as low as a 1.3% annualised rate from as high as a 2.1% pace. The economy grew at a 2.0% pace in the second quarter, slowing from a 3.1% rate in the January-March period.
In addition to the U.S.-China trade war, which is pressuring business investment, the economy is also losing momentum as the stimulus from last year's $1.5 trillion tax cut package fades.
Despite the deterioration in the ISM employment measures and also signs that employers are becoming cautious about hiring more workers, layoffs remain low.
In a separate report on Thursday, the Labour Department said initial claims for state unemployment benefits increased 4,000 to a seasonally adjusted 219,000 for the week ended Sept. 28.
Economists polled by Reuters had forecast claims increasing to 215,000 in the latest week. Claims have now advanced for three straight weeks.
Some of the rise in claims could be the result of an ongoing strike by workers at General Motors (NYSE:GM). While striking workers are not eligible for unemployment benefits, the work stoppage has affected production, impacting non-striking employees at suppliers. There was a jump in manufacturing claims in Michigan during the week ended Sept. 21.
"The initial claims data are consistent with our view that the trend in job growth will soften over time but that it will remain reasonably healthy," said Daniel Silver, an economist at JPMorgan (NYSE:JPM) in New York.
Another report from global outplacement firm Challenger, Gray & Christmas said job cuts announced by U.S.-based employers fell 22.3% to a five-month low of 41,557 in September.