Bullish market analysts and money managers have been somewhat dismissive of deteriorating manufacturing data this year and its importance, arguing that the sector makes up a minute portion of the U.S. economy.
Why it matters: While that is true, manufacturing is a leading indicator, and more bearish investors have insisted the sector's decline would drag the rest of the economy down with it.
Threat level: The U.S. services sector, tracked by the ISM non-manufacturing index, clearly has been following manufacturing lower this year, with Thursday's report showing the sector at its weakest in 3 years.
- As a service-oriented economy, the non-manufacturing sector makes up around 70% of America's growth engine, so the report's downward trajectory is a clear sign of distress.
Details: BMO Capital Markets VP of U.S. rates strategy Jon Hill points out that the index's imports component fell into contraction and both the new orders and inventories segments fell notably.
- Services employment dropped to the weakest since February 2014 and the second-lowest since July 2012.
- ISM's report also noted that "respondents are mostly concerned about tariffs, labor resources and the direction of the economy," eerily similar to comments reported in the manufacturing survey for much of the year.
The big picture: "This, when taken with the revised [IHS Markit U.S. PMI] release ... that showed services jobs declining for the first time since 2010, indicates that some cracks in the non-factory component of the economy are beginning to widen," Hill said in a note to clients.