Businesses expressed concern about tariffs, a shortage of workers and the direction of the economy, ISM said.
Although the service sector is still expanding, the gloomy report raises concern that America’s manufacturing troubles are spilling over into the broader economy. US manufacturing activity dropped deeper into contraction in September
, the most sluggish month for factories since June 2009.
“The weakness in manufacturing has now infected the services side of the US economy,” Peter Boockvar, chief investment officer at Bleakely Advisory Group, wrote in a note to clients on Thursday.
Until recently, the service sector–which makes up about 80% of the economy–had remained strong because of robust consumer spending and low unemployment. The fear now is that a downturn in services will lead to layoffs and market turmoil that forces consumers to slash spending.
The Dow dropped about 300 points
, or 1.1%, minutes after the report was released, although it later bounced off those levels.
“The more growth slows in the US, the greater the likelihood that a shock pushes the economy into recession,” said Gus Faucher, chief economist at PNC.
Investors will be on high alert for more signs of trouble in the broader economy in Friday’s jobs report, which is expected to show a rebound in hiring during September.