Services sector index signals expansion

The U.S. services sector, like its sister sector, manufacturing, continues to exhibit improvement -- something that bodes well for the U.S. economy.

The Institute for Supply Management's Non-Manufacturing Index, also known as the services index, rose to 50.9 percent in September from 48.4 percent in August, the ISM announced Monday. Readings above 50 indicate an expansion; below 50, a contraction. Economists surveyed by Bloomberg News had expected the services index to total 50.0 percent in September. The Index hit a low of 37.4 percent in November.

What's more, the index's closely watched business activity component also rose for the second consecutive month, jumping 3.8 points to 55.1 percent in September from 51.3 percent in August.

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.

In addition, the services index's new orders component also registered a healthy gain, rising 4.3 points to 54.2 percent in September from 49.9 percent in August.

Respondents see improving business conditions

In September, respondents to the services survey offered the following comments, by sector: Construction sector: "Sales are very steady and have risen some each month in the past six months. The bottom is now here." Professional, scientific, and technical services sector: "Continue to see signs of slow recovery, but customers are still putting orders off until the beginning of 2010." Accommodation and food services sector: "Lack of capital available for new project development." Retail trade sector: "Inconsistent ... just when things seem to be settling a bit, a new set of pressures develops."

Investors should monitor the ISM services index due to the large role (60 to 65 percent of GDP) services play in the U.S. economy. The non-manufacturing index surveys about 400 firms in 60 sectors.

Economic Analysis: Both the ISM services index, and the ISM manufacturing Index, which rose to 53.5 percent in September from 52.9 percent in August, indicate an economic recovery is underway. Each is above 50, the level that demarcates expansion from contraction, and each index has risen for about a year. Provided each continues to rise, that would suggest the recovery will have two key components in place. Further, businesses are starting to see an improvement in order flows and are issuing better and brighter outlook comments -- two other indicators that typically precede increases in aggregate demand.

That said, the above does not mean the recovery will be strong -- far from it. Two other components of the recovery -- U.S. consumer spending and business investment -- remain wild cards. So far, consumers have remained cautious, and so long as consumer purchase levels remain below historical norms (also called 'below trend'), it's hard to envision U.S. GDP growth in the recovery rivaling historical recovery GDP growth rates of more than 4 percent.

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