US Service Sector Decline Fuels Recession Fears

07 February 2008

TEMPE, Arizona: Further evidence – if any is needed – that the US economy is tipping into recession, comes from a leading service sector index which is now at its lowest level since October 2001.

The Institute of Supply Management's latest non-manufacturing business report dipped to 41.9 in January from 54.4 in December - the sharpest decline in the survey's 10-year history.

Says survey chairman Anthony Nieves: "Members' comments in January indicate that weakness in the economy coupled with increased costs have negatively affected their business. 

"Members have also indicated that they are experiencing inflationary pressures. The overall indication in January is that non-manufacturing has come to the end of a long-term period of growth and has contracted for the month of January." 
Of the fifteen service industries included in the survey only utilities and educational services reported growth in business activity last month.

Respondents were asked how "you and your management feel about the next twelve months compared to 2007".

Some 42% said worse, another 42% said the same, and 16% said better.

The contraction is all the more significant, say economists, because of the service sector's  increasing importance to the US economy.

Around 60% of consumer spend goes on services, the largest component of GDP.

Declares Bernard Baumohl, managing director of the Economic Outlook Group: "Normally when the economy starts to weaken, households slash spending on pricey items first, like cars, furniture and other goods. But ... there is always a need for medical care, transportation, communications, banking, and even haircuts.

"That's why this latest plunge in the ISM service index is all the more alarming." 

The figures are likely to prompt the Federal Reserve to further cut interest rates.

The results reflect the latest Eurozone Composite Output Index – compiled by the Royal Bank of Scotland and NTC Economics in the UK - which also fell sharply in January.

A rate cut by the European Central Bank cannot be ruled out, but most economists believe it will come later rather than sooner because of current inflationary pressure.

Data sourced from Wall Street Journal Online; additional content by WARC staff