Tariffs and Uncertainty Push Services Sector to Contraction's Edge

The U.S. non-manufacturing sector, which accounts for nearly 90% of the country's economic activity, contracted in September as the Institute for Supply Management (ISM) Non-Manufacturing PMI registered 50.0, below the forecast of 51.6 and a decline from the previous reading of 52.0 . The index, which measures activity in the services sector, fell just below the 50-mark threshold separating expansion from contraction, signaling a slowdown in business activity amid ongoing tariff-related pressures and economic uncertainty .

The contraction was driven by weaker performance in key subcomponents. New orders and production indexes both declined, with the new orders index falling to 44.6 from 47.4 in August, reflecting subdued demand . The production index dropped to 44.8, a further sign of weakening momentum. ISM noted that businesses remained hesitant to invest in capital and inventories, citing ongoing monetary policy uncertainty and the lingering effects of federal tariffs .

Market participants interpreted the data as a validation of concerns about the sector's resilience. The report coincided with a broader shift in risk sentiment, as the U.S. dollar index (DXY) initially dipped following the release, and Treasury yields fell . Gold prices stabilized near $2,485, while equities retreated as investors recalibrated expectations for economic growth. Analysts highlighted that the services sector's proximity to contraction territory underscored vulnerabilities in the broader economy, particularly as tariffs continue to disrupt supply chains and pricing dynamics .

The PMI's decline aligns with broader trends observed in global economic data. S&P Global's final manufacturing PMI for the U.S. also softened to 47.9 in August, below expectations of 48.0 . These readings suggest that the services sector's slowdown is part of a larger narrative of decelerating growth, with the non-manufacturing PMI now signaling a marginal contraction. The index's proximity to the 50-level also raises questions about the durability of the U.S. economy's expansion, which has relied heavily on services-driven momentum .

The report's timing added to its significance, as it followed a partial government shutdown and came ahead of the release of the Bureau of Labor Statistics' employment data. ISM's Susan Spence emphasized that the manufacturing sector's contraction-its seventh consecutive month of decline-highlights the compounding effects of tariffs, inflation, and demand weakness. While the services sector has shown relative resilience, the latest PMI reading suggests that even this critical component of the economy is now showing signs of strain .

The data's implications for monetary policy remain mixed. While the Federal Reserve's recent rate cut was intended to stimulate investment, the persistent uncertainty around tariffs and economic policies has left businesses cautious. ISM noted that capital projects remain on hold for many firms, with companies prioritizing cost containment over expansion. The report underscores the need for policymakers to address lingering uncertainties to prevent further deterioration in business confidence .