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US services sector activity slowed to a three-year low in September amid rising concerns about tariffs, the latest sign that trade tensions were eroding economic momentum.

Despite the rising risks of a recession, the economy likely remains on a moderate growth path. Other reports on Wednesday showed the number of Americans filing for unemployment benefits rose slightly last month and layoffs fell to a five-month low in September. Labour market strength, which is supporting consumer spending, is driving the longest economic expansion in history, now in its 11th year.

The Institute for Supply Management (ISM) said its non-manufacturing activity index fell to a reading of 52.6 in September, the lowest since August 2016, from 56.4 in August.

A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of US economic activity. Economists polled by Reuters had forecast the index would fall to 55.1 in September.

The ISM said businesses "are mostly concerned about tariffs, labour resources and the direction of the economy."

The ISM reported on Tuesday that its measure of national manufacturing activity plunged in September to its lowest level since June 2009, when the Great Recession was ending.

Economic growth estimates for the third quarter are as low as a 1.3% annualized rate. The economy grew at a 2.0% pace in the second quarter, slowing from a 3.1% rate in the January-March period. In addition to the US-China trade war, which is pressuring business investment, the economy is also losing momentum as the stimulus from last year's $1.5 trillion tax cut package fades.

The slump in manufacturing and business spending could prompt the Federal Reserve to cut interest rates again later this month. The US central bank cut rates last month after reducing borrowing costs in July for the first time since 2008 to keep the economic expansion on track.

September's drop in services industry activity reflected declines in measures of production and new orders, which fell to a three-year low. A gauge of services industry employment fell to 50.4 last month, the lowest level since February 2014, from 53.1 in August.

In a separate report on Thursday, the Labour Department said initial claims for state unemployment benefits increased 4,000 to a seasonally adjusted 219,000 for the week ended September 28.

Economists polled by Reuters had forecast claims would increase to 215,000 in the latest week. The Labour Department said no states were estimated last week. Claims have now increased for three straight weeks.

Some of the rise in claims could be the result of an ongoing strike by workers at General Motors. While striking workers are not eligible for unemployment benefits, the work stoppage has affected production, impacting non-striking employees at suppliers. There was a jump in manufacturing claims in Michigan during the week ended September 21.

Another report on Thursday from global outplacement firm Challenger, Gray & Christmas said job cuts announced by US-based employers fell 22.3% to a five-month low of 41,557 in September.

Though layoffs remain low, there are signs the 15-month trade war between the United States and China, which has weighed on business confidence and pushed manufacturing into recession, is making companies hesitant to hire workers.

The ISM survey on Tuesday showed a measure of manufacturing employment dropped to more than a 3-1/2-year low in September. That was followed by a report on Wednesday showing private employers added only 135,000 jobs to their payrolls last month.

The reports bolstered expectations that the government's closely watched employment report on Friday would show another month of moderate job growth in September.

According to a Reuters survey of economists, nonfarm payrolls probably increased by 145,000 jobs in September after rising by 130,000 in August. Job gains have averaged 158,000 per month this year, still above the roughly 100,000 needed each month to keep up with growth in the working-age population.

The unemployment rate is forecast to be unchanged at 3.7% for a fourth straight month in September. Economists say it is unclear whether the loss of momentum in hiring is due to ebbing demand for labour or a shortage of qualified workers.

The number of people receiving benefits after an initial week of aid fell 5,000 to 1.65 million for the week ended September 21, the lowest level since October 2018. The four-week moving average of the so-called continuing claims declined 5,750 to 1.66 million.

Copyright Reuters, 2019

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