The service industry sector expanded at the slowest pace in more than two years in September, as Hurricanes Katrina and Rita shut down businesses along the Gulf Coast and pushed costs for materials and supplies to record highs.
The Institute for Supply Management said Wednesday that its measure of financial services, retail trade and other non-manufacturing businesses fell to 53.3, the lowest since April 2003, from 65 in August. The decline was the biggest since the index, which covers 87 percent of the economy, was started in 1997.
“The services economy had the wind knocked out of its sails in September,” said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi Ltd. in New York. “Service companies are clearly looking at the low readings on consumer confidence and are scaling back their expectations for growth this year.”
And the report’s gauge of prices paid added to inflationary fears. It rose to a record 81.4 from 67.1, led by higher costs for companies engaged in agriculture, legal services, utilities and construction. No industry reported lower prices in September.
The report found that many business executives are concerned about the continuing rise in oil and gas prices after Hurricanes Katrina and Rita, and about the toll rising energy costs will take on the economy.
“That is the $64,000 question–if and when manufacturers and businesses decide they have to pass through these rising prices to consumers,” said Jerry Zukowski, deputy chief economist at Nomura Securities International Inc. “A lot of it is energy. We are clearly not out of the woods in terms of these price pressures.”
Zukowski added that it may be another four or five months before the higher prices are passed on to consumers.
“This gives you an idea of why they Fed raised rates in September,” he said, referring to the central bank’s 11th consecutive rate increase last month.
The hurricanes knocked out refineries and rigs in a region that produces 30 percent of the nation’s crude oil, pushing up gasoline prices and triggering the biggest drop in consumer confidence in 25 years. Service companies responded by curtailing hiring and purchases, the report showed, raising concern that economic growth may weaken.
The employment component of the report dropped to 54.9 from 59.6. New orders fell to 56.6 from 65.8. Export orders tumbled to 55 from 63.5, and the inventory index slid to 50 from 53.5.
