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US services sector activity at 6-month low; shutdown blamed

Key Points
  • U.S. services sector activity slowed to a six-month low in January as businesses worried about the impact of a partial shutdown of the federal government on the economy.
  • The ISM said its non-manufacturing activity index dropped 1.3 points to a reading of 56.7 last month. That was the lowest reading since July and marked two straight monthly declines.
  • Service industry businesses are concerned about the impacts of the government shutdown but remain mostly optimistic about overall business conditions.
A waiter delivers glasses of beer at the Russian River Brewing Company on February 01, 2019 in Windsor, California.
Justin Sullivan | Getty Images

U.S. services sector activity slowed to a six-month low in January as businesses worried about the impact of a partial shutdown of the federal government on the economy.

Despite showing a second straight monthly moderation in activity, the Institute for Supply Management (ISM) report on Tuesday continued to suggest solid economic growth. The five-week government shutdown ended on Jan. 25 after President Donald Trump and Congress agreed to temporarily fund the government, without money for his U.S.-Mexico border wall.

"This was clearly a disappointing non-manufacturing reading, aggravated by a number of factors, one of which was temporary," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto. "We anticipate a retracement of this setback in February, but that temporary factor may return to the fore."

The ISM said its non-manufacturing activity index dropped 1.3 points to a reading of 56.7 last month. That was the lowest reading since July and marked two straight monthly declines.

A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of U.S. economic activity. The ISM's new orders sub-index for the services sector tumbled 5.0 points to a reading of 57.7 last month, the lowest since December 2017. Its business activity or production gauge also fell sharply. There was also a steep decline in the survey's measure of export orders.

The survey's services employment measure rose to 57.8 from a reading of 56.6 in December.

U.S. financial markets were little moved by the data as traders awaited Trump's State of the Union address. The dollar was up against a basket of currencies, while U.S. Treasury yields fell. Stocks on Wall Street were trading higher.

Shutdown hurts sentiment

According to the ISM, respondents were "concerned about the impacts of the government shutdown but remain mostly optimistic about overall business conditions." Some businesses complained about higher prices because of import tariffs and others said they were struggling with capacity constraints.

Eleven services industries, including transportation and warehousing, healthcare and social assistance, finance and insurance, utilities, and public administration, reported growth in January. That was down from 16 in December and the fewest since August 2016.

Seven non-manufacturing industries including retail trade, educational services and information reported contraction in January. The ebb in sentiment was also mirrored by another survey from data firm Markit, which showed its services sector PMI falling to a four-month low of 54.2 in January from a reading of 54.4 in December.

"We think that concerns about the government shutdown may have been depressing sentiment," said Daniel Silver, an economist at JPMorgan in New York. " Now that the shutdown is over, we think that sentiment could bounce back at least somewhat, but this is not guaranteed."

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Key Points
  • The National Retail Federation is calling for retail sales in the U.S. to climb between 3.8 and 4.4 percent this year.
  • It says its preliminary estimate for retail sales growth in 2018 is 4.6 percent, pending the release of December data from the Commerce Department.
  • There are still fears in the industry that a trade war with China or an economic slowdown could impact consumer spending.