Massive Service Sector Economy Falls Into Worst Contraction in Over 10 Years

The October non-manufacturing ISM, which covers the majority service sector (88%) of the US economy, fell more than expected to 44.4 (Consensus 47, prior 50.2). This was the lowest reading ever recorded for the index, which goes back to 1997. Any reading below 50 indicates contraction.

Among the sub-sectors, business activity declined even faster than the headline reading, falling from 52.1 to 44.2. New orders fell from 50.8 to 44, and the order backlog eased down to 44 from 46.5. As with the ISM manufacturing index, inventory sentiment rose, indicating that inventories are probably growing larger than desired. One bright spot was that new export orders held steady at 50 vs 50.5 in September. In addition, the decline in commodity prices helped prices paid fall to 53.4 from 70 the prior month. Obviously lower oil prices feed through into reduced transportation costs for everything. The demand for labor remains subdued. Employment eased down to 41.5 from 44.2.

The composite index of the manufacturing and non-manufacturing indexes fell to 43.8 in October, from 49.4 in September. The ISM manufacturing data released earlier this week showed the manufacturing sector shrinking the most in 26 years in September, as the economy faltered, and credit evaporated for producers and consumers.