Here's some terrible news about the most important part of the US economy

The services sector is slowing down.

Even as the manufacturing sector fell into a recession and remained there for much of 2015, the services sector — which makes up two-thirds of economic activity — held up in expansionary territory.

It, too, however, is now seeing reduced growth.

Two key readings on January activity in the services sector, which contains industries as varied as medicine, law, and journalism, were released Wednesday.

In short, they were not good:

  • Markit’s services purchasing manager’s index (PMI) missed forecasts, at 53.2, the lowest level in 27 months (expected at 53.7 by economists).
  • The Institute of Supply Management’s non-manufacturing composite index came in at 53.5 (55.1 estimated), the lowest since March 2014, and showed that the services sector grew at a slower rate.

Still, both indexes are above 50, the border between expansion and contraction.

One of the big economic themes of 2015 entering 2016 was that as manufacturing started to roll over, the services sector held up, as you can see in the chart below.

But Wednesday’s data shows that this may be changing.

In a note after the report, TD Securities’ Gennadiy Goldberg wrote to clients (emphasis added):

The ISM non-manufacturing sector report’s outperformance of its manufacturing counterpart has recently been a key sign suggesting that US economic growth momentum has been weathering both domestic and global headwinds. Nevertheless, the ISM services sector gauge trimming its recent outperformance may go a long way in fanning fears of a more pronounced slowdown to US growth momentum heading into 2016.

Wednesday’s report from Markit showed that new work increased at a slower pace in January, though employment grew.

Chris Williamson, Markit’s chief economist, noted, however, that backlogs of uncompleted work had been declining in recent months, suggesting that there would be less need for additional hiring unless demand picks up. (The labour market, we’d note, has been the most robust part of the economy over the past few years.)

Here’s a chart that shows the recent slowdown in services, via Markit:

ISM’s index of new export orders contracted 8 points to 53.5, with services producers now pointing to the same things that caused the manufacturing recession, including low oil prices:

“We continue to see record low key commodity prices driving product cost down,” a wholesale trade respondent said in ISM’s survey.

“Record low oil prices are putting extreme pressure on exchange rates for key export markets Canada and Mexico. Falling prices [are] pushing margins down as many are forced to drop prices to meet the competition. Extreme weather conditions this season are adding additional challenge[s] to both retail and wholesale sales volume regionally.”

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