August data indicated that the U.S. service sector continued to struggle for momentum, with both business activity and incoming new work expanding at slightly slower rates than in the previous month.
This contributed to a moderation in job creation to its weakest since December 2014. Meanwhile, service providers are upbeat overall about the 12-month outlook for business activity, and the degree of positive sentiment remained comfortably above the survey-record low seen in June.
At 51.0 in August, the seasonally adjusted Markit final U.S. Services Business Activity Index dropped from 51.4 in July but remained above the 50.0 no-change value for the sixth consecutive month. The latest reading signalled only a marginal increase in business activity, and the pace of expansion was the weakest seen since the upturn began in March. Survey respondents noted that relatively subdued client demand and uncertainty ahead of the presidential election had acted as growth headwinds in August.
Service providers reported a moderate rise in new business volumes in August, with the pace of expansion remaining weaker than the average seen since the survey began in late-2009. Subdued demand patterns resulted in a renewed slowdown in employment growth during August. The latest survey marked six-and-a-half years of sustained job creation, but the latest rise in payroll numbers was the weakest since the end of 2014.
Some firms noted that more cautious staff hiring policies had placed pressure on operating capacity in August. Reflecting this, backlogs of work increased for the second month running and at the most marked pace since April 2015.
The latest survey highlighted that business confidence across the service economy remained well above the survey-record low seen in June. However, the level of optimism was weaker than the post-crisis trend, which firms linked to heightened economic uncertainty and generally subdued client demand. Companies expecting a rise in activity over the next 12 months mainly cited new product launches and hopes of a rebound in business conditions after the presidential election.
On the prices front, August data pointed to another moderate rise in average cost burdens. The rate of inflation was little-changed since July and below the
survey average. Meanwhile, prices charged by service providers increased only marginally in August, which firms mainly attributed to strong competition for new work.
Adjusted for seasonal influences, the Markit final U.S. Composite PMI™ Output Index registered 51.5 in August, down slightly from 51.8 in July. The latest reading signalled a marginal expansion of private sector activity and was in line with the average recorded in 2016 so far.
Manufacturing production growth was unchanged from July’s eight-month high (index at 53.8), and the pace of expansion remained faster than that seen for services activity (51.0).
The composite index is based on original survey data from the Markit U.S. Services PMI and the Markit U.S. Manufacturing PMI.
Chris Williamson, Chief Economist at Markit said:
The weak PMI readings send a downbeat note on economic growth in the third quarter. Taken together, the manufacturing and services PMIs are pointing to an annualised GDP growth rate of a mere 1%, similar to the subdued pace signalled by the surveys throughout the year to date, suggesting that those looking for a strengthening in the rate of economic growth will be disappointed once again.