The services sector in the U.S. unexpectedly tanked in August, plunging private-sector business activity into a second month of contraction.
The S&P Global flash composite purchasing managers index fell to 45 in August, the lowest since February of 2021, from 47.7 in July. Readings below 50 indicate contraction.
The rate of contraction was the fastest recorded outside of the initial pandemic outbreak since the series began nearly 13- years ago.
The further deterioration was unexpected. Economists had expected the index to rise to 49.2.
“August flash PMI data signaled further disconcerting signs for the health of the US private sector. Demand conditions were dampened again, sparked by the impact of interest rate hikes and strong inflationary pressures on customer spending, which weighed on activity,” said Sian Jones, senior economist for S&P Global Market Intelligence.
The services sector PMI dropped to 44.1 from 47.3 last month. Economists had expected it to improve to 49. The manufacturing PMI fell to 51.3, indicating mild expansion.
“Gathering clouds spread across the private sector as services new orders returned to contraction territory, mirroring the subdued demand conditions seen at their manufacturing counterparts. Excluding the period between March and May 2020, the fall in total output was the steepest seen since the series began nearly 13 years ago,” Jones said.
There is also signs that the labor market, which has been incredibly strong this year, is beginning to roll over.
“Lower new order inflows and continued efforts to rein in spending led to the slowest uptick in employment for almost a year. Reports of challenges finding suitable candidates started to be countered by those companies noting that voluntary leavers would not be replaced with any immediacy due to uncertainty regarding demand over the coming months,” Jones said.
Inflationary pressures appear to be easing, although inflation remains historically elevated.
“One area of reprieve for firms came in the form of a further softening in inflationary pressures. Input prices and output charges rose at the slowest rates for a year and-a-half amid reports that some key component costs had fallen. Although pointing to an ongoing movement away from price peaks, increases in costs and charges remained historically robust,” Jones said.
S&P Global said that customer demand has been depressed by material shortages, delivery delays, hikes in interest rates, and inflationary pressures.