Rebound in Services Index Signals Expansion

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The U.S. services sector, like its sister sector manufacturing, is showing an increase in activity, which bodes well for the U.S. economy. The Institute for Supply Management's Non-Manufacturing Index, also known as the services index, rose to 50.1 in December from 48.7 in November, the ISM announced Wednesday. Readings above 50 indicate an expansion; below 50, a contraction.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% A Bloomberg News economists survey had expected the services index to rise to 50.4 in December. The index totaled 50.6 in October, and hit a cycle low of 37.4 percent in November 2008.

The index's closely watched business activity component also jumped 4.1 points, rising for the fourth time in five months, to 53.7 in December from 49.6 in November. The business activity component totaled 55.2 in October.

Meanwhile, the new orders component fell, but nevertheless remained above the 50 expansion demarcation line, dropping 3.0 points to 52.1 in December from 55.1 in November. The new orders component was at 55.6 in October.

Also, the employment component rose 2.4 points to 44.0 in December from 41.6 in November.

Respondents See Some Economic Improvement, But Caution Prevails

In December, respondents to the services survey offered the following comments, by sector: "There has been a slight upturn in our business activities; however, it is not entirely attributable to any one particular source" (public administration sector). "The environment seems to be improving, but we will continue to be cautious as we look forward" (retail trade sector). "No items in short supply; suppliers looking to set up agreements for 2010 with quarterly or semiannual price reviews" (arts, entertainment and recreation sector). "Economy seems to have leveled off with expectation of an upswing in our business in Q1 2010 (professional, scientific and technical services sector). "The current economic conditions are continuing to have a flat or negative effect on our business" (wholesale trade sector).

Investors should monitor the ISM services index since services play a large role in the U.S. economy and trade, as a result of the transfer of many manufacturing operations to lower-cost plants abroad. The non-manufacturing survey polls about 400 firms in 60 sectors.

Economic Analysis

Overall, December's services sector report was good, though somewhat below expectations, with the key take-a-ways being the return of the top-line stat to a level above 50, after a dip in November. The index has been above 50 for three of the last four months and, provided the upward trend continues, one-month dips can be ignored.

Second, the business activity component also returned to a level indicating an expansion, surging four points in the month. Finally, while the new orders component's three-point dip was disappointing, that component, too, remained above the 50 demarcation between expansion and contraction: It has to remain above 50 in the quarters ahead to confirm a strengthening recovery.

In sum, the December ISM services report confirms a mild U.S. economic expansion, with increased business activity in most segments, along with companies that are slightly more optimistic about business conditions. However, concern remains about the source of future demand.
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