US service sector hits doldrums

Recession worries gather steam as contracts drop for first time in nearly 5 years.

Boat 88 224 (photo credit: )
Boat 88 224
(photo credit: )
For the first time in almost five years, the United States' services sector - including restaurants, travel, banking, construction and retail - contracted in January, stoking rising worries of a recession. The Institute for Supply Management's report, released Tuesday, shook the stock market while bond prices surged. The Dow Jones industrial average, the Standard & Poor's 500 index and the Nasdaq composite index all fell. "This is an absolute collapse of this index," said Nigel Gault, chief US economist at Global Insight. The Institute for Supply Management reported that its index of service-sector business activity declined to 44.6 in January from a revised reading of 54.4 in December. Economists surveyed by Thomson Financial/IFR had expected a slight slowdown but had still forecast growth, with a median estimate for the index of 53. A reading above 50 indicates expansion, while below 50 indicates contraction. It was the first time the service-sector reading had contracted since March 2003. The consensus among survey respondents was that the services sector, which accounts for about two-thirds of the economy, has "come to the end of a long-term period of growth," said Anthony Nieves, chairman of the Institute for Supply Management's non-manufacturing business survey committee. Gault said that in March 2001, the beginning of the last recession, the index had a break-even reading of 50, and during that recession the index hung around 48 or 49 - several points higher than January's reading. "This is a very bad report," Gault said, in terms of convincing economists that we may be in or headed for recession. "I think it will be tipping plenty of people over the edge." Price increases have slowed while costs are up, said Nieves, who is also senior vice president for supply management at Hilton Hotels Corp. Survey respondents cited recession fears taking hold, high energy prices, and worries over inflation and the housing market. "It gives me a dose of reality that this sector, which has been resilient for some time, now it has become susceptible to all the influences in the economy," Nieves said. ISM said only three service industries had reported growth, while 14 showed contraction. The three growing segments - utilities, professional services and educational services - include more crucial needs such as doctor visits. Meanwhile, cutbacks in less-essential spending has dragged down such segments as arts and entertainment, fishing and hunting, and lodging and food services. Two measures that fell were those for new orders and employment, which Nieves said were more forward-looking - so their drops could indicate trouble ahead. New orders fell to 43.5 while employment fell to 43.9. "That's not instilling any confidence in me that we're going to see any real strong uplift," he said. The drop in employment is especially troubling, according to Global Insight, because the service sector has been the overall economy's engine of job growth for months. That stirs greater fears of falling employment as factories eliminated 28,000 jobs in January and have cut 269,000 jobs over the past 12 months, drops the government reported last week. The economy as a whole lost 17,000 jobs last month, which was the first nationwide loss of jobs since August 2003, during a recovery from the last recession. ISM also said that non-manufacturing business activity had dropped to 41.9, down from a reading of 54.4 in December.