Service sector index improves, hinting that economy may be stabilizing

The U.S. services sector, like its sister sector, manufacturing, continues to show signs of improvement, and this bodes well for the economy.

The Institute for Supply Management's Service Index rising for the second straight month, to 43.7 in April from 40.8 in March, the ISM announced Tuesday. Readings below 50 indicate a contraction; above 50, an expansion.

The index's closely-watched business activity component also rose for the second consecutive month, climbing to 45.2 in April from 44.1 in March. The business activity component totaled 40.2 in February.

Economists, executives, and market analysts closely monitor the business activity component of the services index because the survey does not contain a composite index, unlike the ISM's manufacturing index.

Senses end to slide

Aaron Smith, senior economist for Moody's in Pennsylvania, made the case that the economic slide is ending, bolstered by renewed consumer spending.

"The economy is on a path to stabilize," Smith told Bloomberg News Tuesday. "The oncoming fiscal support will prevent a renewed slide in consumer spending." However, "it's not going to be a boom-like recovery," he added.

In April, respondents to the service survey said there were signs of improving business conditions, a slight uptick in demand -- but demand that's still far from where it needs to be - and also remarked that tight credit markets were still preventing new business projects. Respondents also noted they are seeing indications that the worst may be over regarding the recession.

Economists surveyed by Bloomberg News had expected the ISM services index to rise to 42.0 in April.

The services index, also known as the non-manufacturing index, surveys about 400 firms in 60 sectors.

Investors should monitor the ISM services index due to the large role (70-75 percent of GDP) services play in the U.S. economy and trade.

Economic Analysis: Both the ISM Service Index and the ISM Manufacturing Index, which rose to 38.3 in April, show signs of a slowing rate of contraction. Although still below 50 -- the level that demarcates expansion from contraction -- each index has risen for two straight months. That suggests the worst period of the recession is over and we're entering a bottoming period. Businesses are starting to see an improvement in order flows and are issuing better and brighter outlook comments.

That said, two months of data does not a recession bottom make: we'll need several more months of data, but the most recent reports are encouraging.

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