Surprisingly Strong News From the Services Sector

Joseph Lazzaro
Updated

The U.S. services sector -- like its sister sector, manufacturing -- continues to confirm an ongoing economic recovery. The Institute for Supply Management reported today that its services index unexpectedly rose 1.7 points in September to 53.2.

ISM services index readings above 50 signal an expansion; below 50, a contraction. A Bloomberg survey had expected the measure to rise to 52 in September from 51.5 in August.

Equally significant, the index's key components continued to signal growth in September, as well.

Better Job Growth Ahead?

The closely watched new-orders component -- a gauge of future demand -- jumped 2.5 points to 54.9. In addition, the employment component popped back above the 50 mark to 50.2 in September from 48.2 in August. That surprising rise could result in higher-than-forecast job growth in the immediate quarters ahead.

Although the prices component dipped to 60.1 in September from 60.3 in August and the business-activity component fell to 52.8 from 54.4, both remained at levels that still signal growth, but at a slightly slower pace.

The nonmanufacturing survey polls about 400 firms in 60 sectors. The respondents to the September survey indicated mixed reactions to business conditions, but were slightly tilted toward optimism. Among their comments:

  • "Signs that the economy may be improving, but our sector is still flat or declining" (professional, scientific, and technical services sector).

  • "Business activity is generally stable -- slightly better than last year" (accommodations and food-services sector).

  • "Third quarter is looking profitable with improving confidence and expectations in the economy. Capital expenditures are being approved (wholesale trade sector).

  • "Business seems to be flat from last month" (finance and insurance sector).

  • "General state of the business has not changed in the last three months. The market is still soft for new sales due to financing requirements" (construction sector).

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Economists, business executives and policy makers monitor the ISM services index due to the large role services play in the U.S. economy -- historically about 65% to 70%.

September's unexpectedly pleasant report makes the probability of a double-dip recession even more remote. To be sure, the housing sector, with a large inventory of unsold homes, remains subpar, and retail sales have been tepid. But both the giant services and manufacturing sectors continue to expand -- which will keep the U.S. economy growing at a modest pace in the next few quarters.

If hiring in the services sector increases in the fourth quarter of 2010 and the first quarter of 2011, that would likely increase U.S. GDP growth.

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