March 3, 2016 10:40 AM, EST
Less Growth Prompts First Service Job Cuts Since 2014
Daniel Acker/Bloomberg News

Growth in U.S. service industries slowed for a fourth straight month in February, prompting the first job cuts in two years.

The Institute for Supply Management’s nonmanufacturing index eased to 53.4 from 53.5 in January, the Tempe, Arizona-based group’s report showed March 3.

While readings above 50 signal expansion, the gauge has posted slower growth since November. The group’s employment measure dipped below the expansion threshold for the first time since February 2014.

Service industries, which range from construction to finance, account for the lion’s share of the economy, and a slowdown risks taking a bigger bite out of growth than the slump in manufacturing. Continued job growth and signs that the recovery remains on track despite market volatility will be needed to persuade consumers to keep spending.

“We’re continuing on the path of growth; it just may be slowing ever so slightly,” said Anthony Nieves, chairman of the ISM nonmanufacturing survey, said on a conference call after the release. “You don’t want to get overly concerned until you see a long trend and we start seeing contraction across these indexes.”

Fourteen of the 18 industries surveyed expanded last month, paced by hotels and restaurants and management companies.

The median forecast of 77 economists surveyed by Bloomberg News called for 53.1. Estimates ranged from 51 to 55.

ISM’s factory survey released March 1 indicated the decline in manufacturing had found a bottom. The index rose for a second month, reaching 49.5 in February from 48.2 the prior month.

Details from the service survey showed the employment index declined to 49.7 from 52.1 in January, indicating companies last month started cutting staff, perhaps in response to the turmoil in financial markets. The drop could color economists’ expectations ahead of the February jobs report, which comes out March 4.

The business activity index rebounded to 57.8 from 53.9, which was the lowest reading since August 2012. The measure is more of a sentiment indicator and parallels ISM’s factory production gauge.

The service new orders index fell to 55.5, the lowest since March 2014, from 56.5. It’s a forward-looking measure and may indicate the sector’s slowdown isn’t over.

The prices paid index dropped to 45.5, the weakest reading in more than six years, from 46.4.

While services still are outperforming manufacturing, momentum seems to have shifted to the latter as factories show nascent signs of recovery. It may only be a matter of time before the pendulum swings in the right direction for service companies as well, according to Tom Simons, a money-market economist at Jefferies in New York.

Services are “just sort of lagging the trends we saw in manufacturing,” Simons said before the report. “The cumulative weakness in manufacturing will probably still have a drag on the service sector for the next few months.”

A rebound in consumer spending would go a long way in supporting services, and there are signs the pickup may be under way. Household purchases in January climbed by the most in eight months, fueled by faster earnings growth.

It will take sustained improvement in the labor market to convince consumers that it's still safe to spend. Payrolls probably increased by about 195,000 in February, according to a median projection of economists surveyed by Bloomberg. The unemployment rate is expected to hold at an eight-year low of 4.9%.