US Service Sector Contracted in January

This journal is beginning to have second thoughts about the possibility of a recession in the US this year. Classically defined as two consecutive quarters of negative economic growth, a recession is still not inevitable. However, with the Institute for Supply Management's report on the service sector’s business activity released yesterday, one is beginning to feel less confident.

Because of the way the Non-Manufacturing ISM Report On Business® is structured, any figure over 50 means expansion and under 50 means contraction. In December, the figure was 54.4, not booming but growing. For January, the ISM’s index read 44.6. Nigel Gault, chief US economist at Global Insight, was quoted by the Associated Press as saying, “This is an absolute collapse of this index.”

Not quite absolute. The ISM release read, “The three industries reporting growth in January based on the new NMI composite index — listed in order — are: Utilities; Professional, Scientific & Technical Services; and Educational Services. The 14 industries reporting contraction in January — are: Arts, Entertainment & Recreation; Agriculture, Forestry, Fishing & Hunting; Construction; Accommodation & Food Services; Transportation & Warehousing; Management of Companies & Support Services; Health Care & Social Assistance; Finance & Insurance; Information; Wholesale Trade; Retail Trade; Public Administration; Other Services*; and Real Estate, Rental & Leasing.”

Nevertheless, the services sector has long been the main driver of the American economy. Manufacturing is now done elsewhere. So, when the services sector takes a hit, the US economy suffers. This is the first contraction in the services sector in five years, and it comes when the rest of the talk about the economy is quite negative.

Of course, one datum doesn’t make a trend. January’s figure could be a statistical anomaly. It does, however, make one seriously reconsider the economic situation in the US. Bad was expected, but this appears to be worse.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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