The Services Purchasing Manager's Index (PMI), formerly known as the non-manufacturing index, registered 56.9 percent, 1.2 percentage points lower than the July reading, according to the latest Services ISM Report on Business.
"Respondents' comments are mostly optimistic and industry specific about business conditions and the economy as businesses are starting to reopen," said Anthony Nieves, chair of the ISM's Services Business Survey Committee.
"Industries that have not reopened remain concerned about the ongoing uncertainty," Nieves said. "There is a challenge with capacity and logistics due to the pandemic and the impact on deliveries and order fulfillment."
Amid widespread COVID-19-induced shutdowns, the U.S. services sector contracted for the first time since December 2009 in April. It saw contraction for two straight months before starting to rebound in June as states reopen.
"We are significantly down from the pre-COVID-19 level," said a business executive from the wholesale trade industry in the latest ISM report. "While month-over-month business activity is picking up, the pace is very slow and very slight."
Tim Quinlan and Sarah House, senior economists at Wells Fargo Securities, wrote in an analysis that although the headline print of 56.9 for the Service ISM index only barely missed consensus in August, "underlying details suggest the initial boost from the re-opening of the service economy is starting to fade."
They noted that the slip in Business Activity Index from 67.2 to 62.4 was slightly more pronounced, and New Orders Index dropped sharply by more than 10 points to 56.8, which was partly offset by longer wait times for supplier deliveries.
The employment component, meanwhile, is looking better at 47.9 last month versus 42.1 in the previous month, but this would still indicate "merely a slowing in the pace of layoff" rather than outright hiring in the services sector, they said.
According to an ISM report earlier this week, economic activity in the U.S. manufacturing sector also expanded in August for the third straight month, with the Purchasing Managers' Index (PMI) standing at 56 percent.