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US services growth rebounds from three-year low

Key Points
  • The Institute for Supply Management (ISM) said its non-manufacturing activity index rose to 56.4 from 53.7 in July which was the weakest level since August 2016.
  • Analysts polled by Reuters had forecast a reading of 54.0 for August.
Employees prepare orders for customers at a Chipotle Mexican Grill restaurant in Hollywood, California.
Patrick T. Fallon | Bloomberg | Getty Images

U.S. services sector activity accelerated in August and private employers boosted hiring, suggesting the economy continued to grow at a moderate pace despite trade tensions which have stoked financial market fears of a recession.

The upbeat reports on Thursday came on the heels of data this week showing the manufacturing sector contracted for the first time in August as the trade war between the United States and China intensified.

But given the erosion of business confidence as a result of the year-long trade impasse and the threat it poses to the longest economic expansion in history, the Federal Reserve is still expected to cut interest rates again this month.

The U.S. central bank lowered borrowing costs in July, citing growing risks to the economy, now in its 11th year of expansion, from the trade fight and slowing global growth. China and the United States on Thursday agreed to hold high-level trade talks in early October in Washington, according to the Chinese commerce ministry.

"Extreme uncertainty over trade issues has soured the sentiment of some in the business community, but companies continue to hold on tight to the workers they have and are also onboarding new workers at a fast clip," said Chris Rupkey, chief economist at MUFG in New York. "This isn't what a recession is supposed to look like."

The Institute for Supply Management said its non-manufacturing activity index increased to a reading of 56.4 in August from 53.7 in July. A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of U.S. economic activity.

Economists polled by Reuters had forecast the index would rise to 54.0 in August.

The ISM said businesses "remain concerned about tariffs and geopolitical uncertainty," but also noted "they are mostly positive about business conditions."

August's surge in services industry activity reflected increases in measures of production and new orders.

But a gauge of services industry employment dropped to 53.1, the lowest level since March 2017, from 56.2 in July. That suggests nonfarm payrolls probably increased at a steady clip in August, even though the ADP National Employment Report on Thursday showed private payrolls surging by 195,000 jobs this month after rising by 142,000 in July.