Services sector index dips a bit in October, but still shows expansion

Here's another sign that the U.S. economic recovery may be mild, not robust: The Institute for Supply Management's Non-Manufacturing Index, also known as the services index, dipped to 50.6 in October from 50.9 in September, the ISM announced Wednesday. Numbers above 50 indicate an expansion in the sector; below 50, a contraction.

A Bloomberg News survey had expected the service index to total 51.6 in October. The index totaled 48.4 percent in August, and hit a low of 37.4 percent in November 2008.
What's more, the index's closely watched business-activity component rose for the third consecutive month, but just barely, inching up 0.1 to 55.2 in October from 55.1 in September. The business activity component totaled 51.3 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.

However, the new-orders component displayed a decent gain, rising to 1.4 to 55.6 in October from 54.2 in September. The new orders index totaled 49.9 in August.

Respondents Cautious Amid Modest Improvement

In October, respondents to the services survey offered the following comments, by sector: Health care and social assistance sector: "General economic tone is still 'wait and see.' Capital outlays are postponed for durable goods." Construction sector: "Overall business activity increasing - forecast even better market conditions in the coming months." Transportation and warehousing sector: "Cost-cutting efforts continue." Professional, scientific, and technical services sector: "Business climate remains encouraging, but recovery will remain slow in rebounding." Wholesale trade sector: "The weakening U.S. dollar contributing to upward pressure on commodity prices."

Investors should monitor the ISM services index due to the large role services play 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

ISM produced a below-consensus October services sector report, but given the long U.S. economic swoon of 2007-2009, economists and business executives will take it, given that the index still indicates an expansion. Both the ISM services index, and the ISM Manufacturing Index, which remained above the 50 expansion/contraction level at 52.6 in October, indicate that the U.S. economic recovery is under way. Each index has risen for about a year; if each continues to rise, that would suggest the recovery has two key components in place. Further, businesses are starting to see improvements in order flows and are issuing better and brighter outlook comments -- two other indicators that typically walk hand-in-hand with increases in aggregate demand. The remaining pieces of the U.S. recovery puzzle? Consumer spending and business investment. Rebounds in each are needed for U.S. GDP to achieve its historical, initial-stage GDP growth rate of better than 4 percent.
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