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The U.S. economy's most important sector is weakening

A sharp downturn among U.S. manufacturers caused by slowing global growth and the Trump administration's trade wars is spilling over into the crucial services sector, a worrying signal for an economy that is already losing speed. 

Growth among services companies — which make up nearly 80% of gross domestic product in the U.S. — slowed last month to its lowest level in three years, according to data released on Thursday. The Institute for Supply Management, an association of purchasing managers, said its non-manufacturing index slipped to 52.6, from 56.4 in August (Readings above 50 signal growth, while those below that reading indicate contraction.) 

"The weakness in manufacturing has now infected the services side of the U.S. economy, which makes up about 80% of it," Peter Boockvar, chief investment officer with Bleakley Advisory Group, said in a note to clients.

Economic growth has steadily slowed this year, from 3% in the first quarter to 2% person between April and June. Most forecasters estimate growth in the current quarter at less than 2%.

September's non-manufacturing figures are the weakest since August of 2016. Sales, new orders and hiring all slowed, as services companies expressed concerns about the toll tariffs are taking on their businesses and the economy.

A separate survey from IHS Markit showed new business growth around the country at its lowest level in 10 years. "The past two months have seen one of the weakest back-to-back expansions of business activity since 2009, sending a signal of slower GDP growth in the third quarter," Chris Williamson, IHS Markit's chief business economist, said in a news release.

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The services sector and job market have largely been responsible for keeping the economic expansion going even as manufacturing slumps. The ISM's factory index shows that manufacturers are mired in their deepet slump since the Great Recession.

While the economy is still adding jobs, the rate of job creation this quarter has slowed to an average of 155,000 a month, down from 223,000 a month last year, and firms have pulled back on hiring plans, according to the ISM reports. 

A new headwind could come in the form of a deepening rift over trade between the U.S. and European Union. The Trump administration on Wednesday announced plans to impose tariffs on $7.5 billion worth of European imports beginning October 18. The new levies are in retaliation for illegal European Union subsidies for aviation giant Airbus, according to the U.S.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, warned that higher tariffs on imported European goods like whiskey, coffee and butter threaten could hit consumer spending in the U.S., another pillar of the economy.

"Back in the spring we thought that the President ultimately would not apply tariffs to consumer goods, on the grounds that most politicians would think it unwise to strip spending power from their core supporters — tariffs disproportionately hurt people on lower incomes — with an election in the offing," he said in a note. "We were wrong, but the entirely predictable consequences are now coming to pass, even more quickly than we expected." 

— With reporting by The Associated Press.

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