U.S. service industry growth falls to 3-year low

gauge of service industries declined in July to an almost three-year low as orders continued to cool, indicating a sluggish start to the third quarter for the biggest part of the economy.

The nonmanufacturing index fell to 53.7, the weakest since August 2016 and well below the median forecast of economists, data from the Institute for Supply Management showed Monday. While still expanding, the purchasing managers’ group’s measures of orders and business activity were also the lowest since mid-2016. Readings above 50 indicate growth.

The July decline follows the institute’s report last week that showed a fourth-straight month of slower growth in manufacturing. Together, the figures point to the growing economic risks that Federal Reserve officials highlighted when they reduced interest rates last week for the first time in a decade.

The index comes from a survey of businesses. Some of the respondents said that tariffs against China launched by President Donald Trump have complicated their businesses, a challenge that could increase if the administration expands import taxes as planned in September.

“We’re seeing this easing, this slowing,” said Anthony Nieves, chairman of the Institute for Supply Management’s nonmanufacturing business

While the sluggish global economy and trade friction between the U.S. and China have had a more pronounced effect on manufacturing, the concern at the Fed is that the weakness will extend to services, which account for about 90% of the economy and include industries such as retail, health care, and construction.

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Nieves said that a slowdown can occur during the summer months, but the survey indicates that the decadeplus expansion will continue.

“I don’t think we’re anywhere near a recessionary period,” he said.

While the sluggish global economy and trade friction between the U.S. and China have had a more pronounced effect on manufacturing, the concern at the Fed is that the weakness will extend to services, which account for about 90% of the economy and include industries such as retail, health care, and construction.

Among other categories in the institute’s nonmanufacturing report, a measure of inventories suffered the biggest decline since December.

An index of export orders also retreated as overseas customers cut back on demand for U.S. services and merchandise.

Trump escalated the trade conflict last week, announcing plans to impose a 10% tariff in September on an additional $300 billion in Chinese goods which include consumer items like laptops and clothing that will have a more direct impact on U.S. retailers.

The report’s business activity measure slumped 5.1 points to 53.1, also the lowest since August 2016.

Export orders declined to the lowest since March, according to the index. That suggests the U.S. trade deficit, which narrowed in June by less than forecast, will be hard-pressed to improve.

The institute’s nonmanufacturing employment index was about the only bright spot in the report, recouping only a portion of June’s decline.

A gauge of prices paid fell to 56.5 from 58.9, the biggest drop in three months as tepid global demand reduces price pressures.

The institute’s measure of order backlogs retreated, suggesting companies are having an easier time fulfilling orders.

The median forecast in a Bloomberg survey of economists was 55.5, with estimates ranging from 53.3 to 58.3.