Growth reported in service industries

Source: Supply Chain Digital

Date :06/11/2007 07:13:35

An increase in new orders helped drive the U.S. services sector to a faster-than-expected growth rate in October

However, economists warned the data didn’t foretell that economic growth would pick up soon.

Above expectations

The Institute for Supply Management said yesterday that its index gauging the health of non-manufacturing industries registered 55.8, up from 54.8 in September. A reading above 50 indicates expansion, while one below 50 shows contraction.

The result was stronger than the reading of 54 analysts had expected.

The services sector — such as airlines, hair salons, accountants, doctors, dentists and plumbers — has been helping to prop up the economy even as manufacturing has slowed.

“Non-manufacturing business activity increased for the 55th consecutive month in October,” said Anthony Nieves, chairman of the ISM.

The report’s components showed growth in orders and slower expansion rates in employment and prices. Nine non-manufacturing industries, including mining, retail trade, construction, real estate, rental and leasing, professional, scientific and technical services, reported increased activity in October.

Shock

Bernard Baumohl, managing director of the Economic Outlook Group,

said the strength of the survey was a surprise but cautioned that the state of the services sector is not always the best harbinger of an economic turning point.

“To determine a turning point in the economy you have to look at the goods producing sector,” he said.

“People tend to still go to the dentist and the doctor even when things turn down,” he said. “But you can put off a purchase of goods.”

Last week, the Labor Department said the economy in October created far more jobs than had been expected and other reports also have shown the economy holding up. Yet many economists think that in time the strains of rising defaults on subprime home loans and falling home prices will affect large numbers of consumers and slow their spending.

In addition, buyers continue to shun the riskier portions of the credit markets and bad debt is taking a toll on Wall Street. This phenomenon also is expected by many to ripple into the broader economy.

Slowdown

According to Baumohl, if consumer spending slows in coming quarters, it will eventually apply the brakes on the services sector, which he estimates at 85 percent of the U.S. economy.

Another economist said the survey lags at least one month behind retail shopping tallies in giving a reading on the economy.

“It tells us nothing at all about the strength of activity today, still less [about] the future,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

Sal Guatieri, senior economist at BMO Capital Markets, pointed out that the latest reading of 55.8 is not as vigorous as the average of 58 seen in 2006.

“The trend appears to be moderating, but the economy is hanging in better than we would have anticipated given what is happening in housing and credit markets,” he said.

November 6, 2007