Business activity in the US services sector unexpectedly slipped back into slight contraction, ending 15 months of growth, hit by sluggish demand and still mixed but cooling employment amid lingering concerns over inflation and geopolitical risks, according to the latest survey by the Institute for Supply Management (ISM).

The ISM index, which shows the directional change of economic activity, slumped 2.0 percentage points to a 16-month low of 49.4 in April for a third straight monthly drop after falling 1.2 points to 51.4 in March. The index came in weaker than the median economist forecast of 52.0 and its 12-month average of 52.2. The last contraction was seen in December 2022, when the index plunged to 49.0.

"The decline in the composite index in April is a result of lower business activity, slower new orders growth, faster supplier deliveries and the continued contraction in employment," Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement."Survey respondents indicated that overall business is generally slowing, with rates varying by company and industry.

"Employment challenges continue to be primarily due to difficulties in backfilling positions and/or controlling labor expenses," he said."The majority of respondents indicate that inflation and geopolitical issues remain concerns."

Nieves told reporters that one month of contraction is not a trend and stressed that new orders are still showing growth, although he didn't rule out another month of contraction.

Of the four sub-indexes that directly factor into the services PMI, the business activity index plunged 6.5 percentage points to a nearly four-year low of 50.9 in April after edging up 0.2 point to a six-month high of 57.4 in March. It is now below 52.9 recorded in May and 53.3 in April 2023 and the lowest since 41.2 in May 2020, when the pandemic caused a global slump. The new orders index fell 2.2 points to a 16-month low of 52.2 after dipping 1.7 points to 54.4 in March. It still indicates expansion for the 16th consecutive month. The employment index showed contraction for the fifth time in 12 months. It fell 2.6 points to 45.9 after rising 0.5 point to 48.5 in March.

The supplier deliveries index -- the only ISM index that is inversed -- rose 3.1 points to 48.5 after falling 3.5 points to a record low of 45.4 in March, which was the fastest deliveries since July 1997, when the ISM began tracking them. The index shows contraction for the third month in a row, indicating that supplier delivery performance was still"faster" after being"slower" in January, when the index jumped to a 14-month high of 52.4. A reading of below 50 indicates faster deliveries, which reflects improved supply chains and lower customer demand.

The prices paid index stays volatile, rising 5.8 points to 59.2 in April after falling 5.2 points to a four-year low of 53.4 in March, slumping 5.4 points to 58.6 in February and soaring 7.3 points to an 11-month high of 64.0 in January. The March level of 53.4 is the lowest since 50.4 in March 2020 and well below its record high of 83.8 hit in March 2022. The index has been above the neutral line of 50 for nearly seven years since 49.6 in May 2017.

ISM services are expected to rise in April to 52.0 versus 51.4 in March which, though more than a point lower than expected, extended a yearlong run in the mid-to-low 50s.

Producing a monthly composite on general activity tracked in volumes, the Institute for Supply Management surveys several hundred service-providing firms from 16 industries (construction and mining are included). The services composite index has four equally weighted components: business activity (closely related to a production index), new orders, employment, and supplier deliveries (also known as vendor performance). The first three components are seasonally adjusted but the supplier deliveries index does not have statistically significant seasonality and is not adjusted. For the composite index, a reading above 50 percent indicates that the services economy is generally expanding; below 50 percent indicates that it is generally declining. The supplier deliveries component index requires extra explanation: a reading above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM services index, investors will know what the economic backdrop is for the various markets. The services index is a composite of four equally weighted components: business activity, new orders, employment, and supplier deliveries. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly -- and causing potential inflationary pressures. While the ISM manufacturing index has a long history that dates to the 1940s, this report goes back to 1997. Note that in 2020 the ISM changed the name of the report to services from non-manufacturing though it continues to track two key goods producing industries: construction and mining.