US: Data suggests weakening is no longer isolated to the factory sector

Data released today showed that the ISM non-manufacturing index dropped in September to 52.5, below the 55 expected. Analysts at Wells Fargo point out the decline seemed almost inevitable after last month’s surprisingly strong report. They warn about growing signs of weakness spreading.

Key Quotes:

“Despite a sharp escalation in the trade war in August and ubiquitous headlines about recession risk rising as a widely watched portion of the yield curve temporarily inverted, the ISM non-man jumped 2.7 points. The August increase stood in stark contrast to multi-point declines in the Markit Services Survey and regional Fed service sector PMIs.”

“Today’s drop, however, was steeper than even our below-consensus forecast (and the entire consensus for that matter). At 52.6, the ISM non-man is now more closely in line with other service-focused PMI measures, and corroborates signals that economic activity is moderating beyond the factory sector.”

“At 50.4, the employment index is at its lowest level since early 2014 and dangerously close to a contractionary reading. The pullback in the employment component makes the consensus estimate for Friday’s payroll report, currently just shy of 150K, look high. More generally though, the slowdown in hiring inserts some fragility into the outlook for consumer spending as labor income looks at greater risk of slowing at the same time consumer confidence has wobbled.”

“We expect GDP growth to slow to a roughly 1.5% pace over the next few quarters, which is decidedly below FOMC members’ estimates of potential growth. With sustaining the expansion now an explicit goal of the committee, today’s report supports our outlook for another 25 bps cut before year-end, with the odds increasing that it comes as soon as this month, and that it won’t be the last of the Fed’s “mid-cycle adjustment.”

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