Service Sector Picks Up Speed, Growing at Fastest Pace Since May

The U.S. service sector, like its sister sector manufacturing, continues to confirm an ongoing recovery, as the Institute for Supply Management's service sector index climbed 0.7 points in November to 55. -- its fastest growth rate in six months.

ISM service index readings above 50 signal an expansion, below 50 -- a contraction. A Bloomberg survey had expected the index would rise to 55 in November from 54.3 in October.

Key Components Continue to Confirm Expansion

Equally significant, the index's key components continue to signal growth in November -- although two of these four declined.

The index's closely watched new orders component -- a gauge of future demand -- rose 1 point to 57.7. The business activity/production component, however, fell 1.4 points to 57.

In addition, the employment component rose 1.8 points to 52.7 in November, up from 50.9 in October and 50.2 in September -- its third straight month above the 50 demarcation line -- something that may result in higher service sector job growth in the immediate quarters ahead.

The prices-paid component, however, plunged a steep 5.1 points to 63.2 in November.

Survey Respondents: Cautious Optimism

Respondents to the service sector survey in November reflected cautious optimism, for the most part:

"Business remains steady; outlook for the fourth quarter is good" (information sector).

"Trending favorable -- see more activity toward additional staff and capital expenditures for 2011" (finance and insurance sector)

"Business is stable. Customers are exerting a lot of pressure to lower prices" (agriculture, forestry, fishing, and hunting sector)

"Slight uptick in orders, but nothing to indicate sustainability" (professional, scientific, and technical services sector)

Economists, business executives, and policy makers monitor the service index due to the large role services play in the U.S. economy and trade -- historically about 65% to 70% of the U.S. GDP. The nonmanufacturing survey polls about 400 firms in 60 sectors.

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November's report is a victory for stock market bulls, as the nonmanufacturing sector is showing continued signs of strength. Add that strength to a manufacturing sector that also continues to expand, and declining initial jobless claims, and the picture is one of a gradually improving U.S. economic expansion.

To be sure, the U.S. economy is still growing well below its potential, and unemployment, which rose in November to 9.8% -- is horribly high, but investors, business executives, and job seekers alike can head into 2011 knowing that the service sector will continue to add to GDP growth and jobs as the new year begins.

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