The US service sector – which makes up most of the nation’s economy – contracted in October, according to the National Association of Purchasing Management’s index of non-manufacturing business activity.

The index tumbled from 50.2, signifying modest expansion, to 40.6, the lowest reading and sharpest drop in the survey’s four-year history. Since a figure below 50 reflects contraction, the results suggest that the manufacturing slump has spread to the rest of America’s economy.

Moreover, the index measuring new orders, reflecting the longer-term outlook, also slumped below 50, suggesting that a recovery is not imminent. Many analysts had hoped that growth in the service sector would steer the US clear of recession.

The downturn was labelled “abrupt” and “severe” by the survey’s head, Ralph Kauffman, though he added that the events of September 11 had only exacerbated existing weakness: “By increasing the level of uncertainty in the economy, [the attacks] had the apparent effect of solidifying earlier tentative decisions to reduce business commitments and employment.”

The NAPM’s index is based on surveys of more than 350 purchasing executives in a host of non-factory industries, including healthcare, finance, entertainment, retail, wholesale, consulting and real estate.

News source: Financial Times