Service Sector Index Rises Slightly in January

A key service sector index came in below the consensus estimate for January, but the slight rise nevertheless confirms a U.S. economic expansion. The Institute for Supply Management's Non-Manufacturing Index rose 0.7 to 50.5 in January from a revised 49.8 in December, the ISM announced Wednesday. Readings above 50 indicate an expansion; below 50, a contraction.Economists surveyed by Bloomberg News had expected the services index to rise to 51.0 in January. The index was at 48.4 in November 2009, and hit a cycle low of 37.4 in November 2008.

However, the index's closely-watched business activity component regressed in January, falling one point to 52.2 from 53.2 in December.

Meanwhile, the new orders component remained above the 50 expansion/demarcation line, jumping to 2.5 points 54.7 from 52.0 in December. Additionally, the employment component rose 1 point to 44.6 from 43.6 in December. The employment component hit a low of 31.1 in November 2008.

In January, respondents to the services survey offered the following comments, by sector:
* "Business is better, but not robust" (agriculture, forestry, fishing, and hunting sector).
* "Outstanding production month, highest since March 2009, but still lower than December 2008" (wholesale trade sector). * "Some client capital spend plans have been delayed until 2nd or 3rd quarter" (professional, scientific and technical services sector).
* "The recent unexpected rise in fuel prices, with no apparent justification, is cause for concern" (public administration sector).

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

Services sector activity slowed in January, but investors should keep in mind that it's only one month -- not nearly long enough to negate the U.S. economic expansion narrative.

Further, there were bright spots in the below-consensus services report. Chief among these was the employment component, which added another point to 44.6. The employment component still indicates a contraction in hiring, but the upward trend is encouraging, especially after the recession's massive job layoffs that plunged the component to a record low of 31.1 in late 2008.

Also, respondents' comments were generally favorable: they paint a picture of longer-term improvement in service sector conditions, with increased demand, although not robust conditions.
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