The markets had tried to stage a recovery on Thursday, but after an 800-point drop in the Dow Jones industrial average in two days, more weak economic data quickly knocked off another 200 points from the index. After weaker-than-expected manufacturing data was at a 10-year low and representing contraction, now the services sector is seeing some weak data as well. This matters far more than the manufacturing data because non-manufacturing activities are by far the overwhelming majority of the U.S. economy.

The Institute for Supply Management has released its ISM Non-Manufacturing Index with a reading of 52.6% for September. That is down from 56.4% in August, and consensus estimates were 55.3% from Dow Jones and 55.5% from Econoday.

What is interesting about the September readings within the index is that general business activity was strong, with the Business Activity Index at 55.2%, but down 6.3 percentage points from August. The New Orders Index also fell 6.6 percentage points to 53.7%. The big drag came from the Employment Index at 50.4%, and while that is close to the 50.0% break-even line, it was down just 2.7 percentage points from the prior month.

What matters is that the index is still handily above the 50.0% break-even line. Still, seeing three-year lows for the general reading in the headlines is going to bring back more and more calls for “recession” in the media. We already have an impeachment inquiry, a U.S./China trade war, slowing global growth and negative interest rates in Europe and Japan to contend with. Technically, this represented the 116th consecutive month that the non-manufacturing economy saw gains.

Additional data from the ISM showed that 13 non-manufacturing industries reported growth. The services and non-manufacturing economic growth was less robust than in August, and the survey respondents voiced concerns about tariffs, labor resources and the direction of the economy.

The Prices Index increased 1.8 percentage points from the August reading of 58.2% to 60.0%, indicating that prices increased in September for the 28th consecutive month. On top of prices rising from August, other subindexes were mostly positive with some gains:

• Supplier Deliveries up 0.5% at 51.0%
• Inventories down two points to 53.0%
• Backlog of Orders up five points to 54.0%
• New Export Orders up 1.5 points to 52.0%
• Imports down 1.5 points to 49.0%
• Inventory Sentiment up two points to 58.0%

As a reminder, the main index reading and subindex readings above 50% represent growth in the services and non-manufacturing economy. Readings below 50% indicate that activity generally is contracting. That said, the ISM does clarify these generalities, along with how the real news looks versus headlines and how it translates to potential gross domestic product (GDP):

An NMI above 48.6 percent, over time, generally indicates an expansion of the overall economy. Therefore, the September NMI indicates growth for the 122nd consecutive month in the overall economy and expansion in the non-manufacturing sector for the 116th consecutive month… The past relationship between the NMI and the overall economy indicates that the NMI for September (52.6 percent) corresponds to a 1.4-percent increase in real gross domestic product (GDP) on an annualized basis.

With so much emphasis on the consumer and on jobs, the ISM data showed that 11 industries reported increased employment and four industries reported lower employment. The general commentary indicated that the number of new employees is starting to level off and that a tightening workforce is leading to a more competitive market for qualified potential employees. The four industrial categories reporting a reduction in employment were: Educational Services; Finance & Insurance; Professional, Scientific & Technical Services; and Wholesale Trade.

The 13 industries reporting growth of business activity in September were, in order: Utilities; Construction; Retail Trade; Mining; Finance & Insurance; Real Estate, Rental & Leasing; Public Administration; Transportation & Warehousing; Health Care & Social Assistance; Information; Professional, Scientific & Technical Services; Accommodation & Food Services; and Management of Companies & Support Services. The two non-manufacturing industries reporting a decrease in business activity for September were in Educational Services and the Other Services category.

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