Service Sector Index Jumped in March, Confirming Economic Expansion

On Monday, investors received another sign that the U.S. economic expansion is taking hold: The Institute for Supply Management's Non-Manufacturing Index, commonly known as the services index, unexpectedly jumped 2.4 points to 55.4 in March. Readings above 50 indicate the sector is expanding; readings below 50 indicate that it's contracting.

The consensus expectation of economists surveyed by Bloomberg News had been that the services index would rise to 54 in March. The index was at 50.5 in January, 49.8 in December and 48.4 in November. It hit a recent low of 37.4 in November 2008.

Business Activity Component Surges

In a key development, the index's closely watched business activity component rocketed 5.2 points higher in March to 60 from 54.8 in February.

In addition, the new-orders component also remained above the 50 expansion-demarcation line in March, surging 7.3 points to 62.3 from 55 in February.

The employment component rose 1.2 points to 49.8 from 46.8 in February. The employment component hit a low of 31.1 in November 2008.

In March, respondents to the services survey offered the following comments, by sector:

"Business conditions have returned to normal [pre-recession]. Our business is up significantly since 2009. We are very positive about the upcoming year" (information sector). "Brisk business activity continues as more projects get 'green light' " (utilities sector). "Demand for loans, credit cards, mortgages and equity lending is expected to continue to increase" (finance and insurance sector). "Observing some relaxation on several fronts regarding spending and hiring. Still very cautious, but making investments where they make sense" (retail trade sector). "The economy appears to be holding its own; however, state and local funding is projected to decrease next fiscal year" (educational services sector).

Investors 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 sites abroad. The nonmanufacturing survey polls about 400 firms in 60 sectors.

Expansion Taking Hold

The three key takeaways from the March services report obviously are the impressive increase in the top-line index and the continued progress in two of the index's key components: business activity and new orders. Each suggests an expansion that's gaining steam.

But almost as impressive was the rise to 49.8 in the employment component. True, this measure isn't at a level that indicates growing employment, but the recent trend is encouraging: In the three months since December 2009, it has risen more than 6 points from 43.6. That suggests that the U.S. job market continues to recover. That bodes well for monthly, net job gains for the U.S. economy in the months ahead -- the final piece in the recovery's puzzle.

The Latest from our Partners