Growth in the US service sector hit a five-month low in February


US business optimism was the weakest since September 2016 (Source: Getty)

US services experienced a slowdown in February, as growth dipped to a five-month low with companies becoming more cautious about spending and hiring.

IHS Markit's US services purchasing managers' index (PMI) fell to 53.8, but the indicator still signals healthy expansion of output in the world's largest economy - any figure below 50 denotes contraction.

The figure was down from January's 14-month high of 55.6 and below the long-run series average of 55.3. However, activity was bolstered by new contract wins and the launch of new products.

Rates of expansion in activity, new work and employment eased in February, but the expansion of new work was enough to push service providers to take on new staff.

Despite optimism being the weakest since September 2016, the index was still in positive territory by a comfortable margin. Improving demand, new products, innovation, business expansions and the end of the election cycle were all mentioned as factors expected to drive activity growth, Markit's report said.

Read more: UK services PMI: business activity growing at slowest pace for seven months

Taken together with January's indicator, the PMI readings suggest the US economy is growing at a respectable annualised rate in the first quarter, approaching 2.5 per cent, said Chris Williamson, chief business economist at IHS Markit.

"The burning question is whether the February slowdown merely represents some pay-back after a strong start to the year for US businesses, or whether it’s the start of a more entrenched slowdown."

Williamson said a warning clue lies with the business expectations index, which shows business optimism has eased back to its post-election level, suggesting companies are becoming more cautious when it comes to spending and hiring.

However, companies continue to report buoyant domestic demand, especially from consumers, and continue to take on staff in reasonable numbers, the rate of hiring having slowed only modestly. The February survey is broadly consistent with 175,000 payroll jobs being added, which represents a pace of hiring that will do little to deter the Fed from delaying its next rate hike.