U.S. Service Sector Grows at Fastest Pace in Two Years

The Institute for Supply Management's Non-Manufacturing Index, commonly known as the services index, continued to signal an expansion, rising to a better-than-expected 53.0 in February from 50.5 in January.

A Bloomberg News economists' survey had expected the services index to rise to 51.0 in February. Readings above 50 indicate an expansion; below 50, a contraction. The index was at 49.8 in December and at 48.4 in November. It hit a cycle low of 37.4 in November 2008.

Key Components Also Rise

In addition, the index's closely watched business activity component also rose 2.6 points in February to 54.8 from 52.2 in January.

The new orders component also remained well above the 50-point expansion-demarcation line, inching 0.3 points higher to 55.0 from 54.7 in January. And, the employment component jumped 4 points to 48.6 from 44.6 in January. The employment component hit a low of 31.1 in November 2008.

In February, respondents to the services survey offered the following comments, by sector: "Conditions for our business have substantially improved over the last three months" (information sector). "We are proceeding with caution based upon the current market conditions" (public administration sector). "Business activity about the same as last month. Perhaps a slight increase in new orders for material and services -- nothing major." (utilities sector). "The overall unemployment and the net effect of housing [instability] continue to affect our business" (retail trade sector). "Business is okay. Customers are doing a lot of price shopping" (agriculture, forestry, fishing and hunting sector).

Investors should monitor the ISM services index because of 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.

The bottom line for investors regarding the February report? The month offered more signs of growth in the services sector, with the key business activity component registering an impressive gain. The employment component's four-point jump also is encouraging: The component still indicates a contraction in jobs, but the recent trend higher is encouraging, especially after the recession's massive job layoffs sent the component plummeting to a record low of 31.1 in late 2008.

The respondents' comments remained generally favorable: For the most part, they paint a picture of improving services sector conditions, with increasing -- though not yet robust -- demand.