Service Sector of Economy Slowing

Non-Manufacturing ISM, which basically covers the service industries, unexpectedly weakened more than expected in July, falling to 55.8 (consensus 59) from 60.7 in June. This brings this series in line with other indicators. Since inception, the index has averaged 57.5, so it is now below the long-term average.

The slowing in services, which was also apparent in this morning's employment report, is not a healthy sign for the economy as services now make up the majority of GDP, and have been the main driver of employment growth this year. It appears that the third quarter may be getting off to a slow start as tightening credit, weak housing, and consumer spending declines lead to contracting GDP growth prospects.

The sub-indexes were also weak. New orders fell to the lowest level in over four years, and the employment component slipped by over 3 points to a relatively neutral 51.7 for non-manufacturing industries. Inventories rose to 55. One hopeful factor for growth is that backlogs rose from 46.5 to 53. On the positive side for inflation, prices paid declined four points to a still elevated 61.3.