U.S. Service Sector Slowed in August

A gauge of U.S. service-sector activity dropped in August, signaling slowing growth in key sectors of the U.S. economy.

The Institute for Supply Management on Tuesday said its nonmanufacturing index fell to 51.4 in August from 55.5 in July. A reading above 50 signals expansion while a reading below 50 indicates contraction. The index has run above the 50 threshold for 79 straight months.

Economists surveyed by The Wall Street Journal had expected an August reading of 55.0.

"The majority of the respondents' comments indicate that there has been a slowing in the level of business for their respective companies," said Anthony Nieves, who oversees the ISM survey. He said it was too early to gauge whether a sustained slowdown had arrived, but he noted that last month's growth rate was "not a sustainable level."

Many of the details of Tuesday's report were negative. The business-activity index fell substantially to 51.8 in August from 59.3 in July. The new-orders index also dropped sharply to 51.4, from 60.3 in July. The employment index edged lower in August to 50.7, from 51.4 in July.

A total of 11 nonmanufacturing industries tracked by ISM reported growth last month, while seven sectors reported contraction.

The broader U.S. economy posted weak growth in the first half of 2016, with gross domestic product expanding at a modest 1.1% annual rate in the second quarter following a first-quarter growth pace of just 0.8%, according to the Commerce Department.

The service sector continued to add jobs in August, according to last week's monthly jobs report from the Labor Department. Restaurants and bars added jobs, as did the social assistance industry, professional and technical services, health care, and financial services. Manufacturing and mining shed jobs over the month.

The ISM nonmanufacturing index covers a wide swath of business activity including retail trade, construction and services including health care. It has signaled continuous expansion since early 2010, though growth has slowed over the past year.

A separate measure of service-sector activity from private data provider Markit released earlier Tuesday showed its services purchasing managers index fell to 51.0 in August, a six-month low, from 51.4 in July.

The manufacturing sector had stabilized this spring after months of contraction under pressure from a strong dollar, which makes U.S. exports more expensive for foreign customers, and low oil prices that pinched domestic energy firms. The ISM's index of manufacturing activity fell into contraction in August, after posting five straight monthly readings above 50, the Institute said in a Sept. 1 report.

Write to Anna Louie Sussman at anna.sussman@wsj.com