U.S. services sector activity was flat in August, with business activity shrinking for the first time since May 2020 while employment contracted for the fourth month in a row, and the fifth time in the past six months. Prices also remain elevated.

The ISM Services PMI dipped to 50.0 in September, down from the 52.0 recorded in August, and disappointing expectations for 51.6 in the Econoday survey of forecasters.

September's Services PMI level returned to numbers very similar to May and July, with weakness in business activity and continued weakness in employment, the report said. Commentary in general indicated moderate or weak growth, with more isolated observations of supplier delivery challenges.

Employment continues to be in contraction territory, thanks to a combination of delayed hiring efforts and difficulty finding qualified staff, it added.

The Business Activity Index fell to 49.9 in September from 55.0 in August. New orders remained in expansion territory but grew at a slower pace compared to the previous month, while employment shrank at a slower rate compared to August.

Prices increased at a slightly faster rate compared to August and have now been in elevated territory for ten consecutive months its longest such streak since October 2020 to March 2023.

After bouncing to 52.0 in August from 50.1 in July, the index is expected to hold in at 51.6 in September.

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.