Service Sector Growth Offset by Job Losses
The Institute for Supply Management said Wednesday its service sector index rose to 50.5 last month, from a downwardly revised 49.8 in December. Economists polled by Thomson Reuters had expected a higher level of 51. Still, it was the index's strongest reading since May 2008.
Any reading above 50 signals growth. That threshold was broken in September for the first time in 13 months. But the service sector's recovery has been bumpy since, having shrunk in November and December. That's a concern for the broader economic rebound.
"Outside the factory sector, the economy is hardly growing, largely because of continued weakness in construction and lackluster retail activity," Sal Guatieri of BMO Capital Markets said in a note to investors.
With consumers squeezed by job losses and flat wages, the recovery "remains at risk" if government programs that support the housing market end this spring as scheduled, Guatieri said.
Overseas sales and the restocking of inventories have helped manufacturing grow faster than the service sector, aiding overall U.S. economic output. On Monday, the ISM said its manufacturing index jumped to 58.4 in January - its strongest point since 2004 - from 54.9 in December.
The service sector relies more on U.S. consumers, whose spending powers about 70 percent of the economy but "who are broke," said Ian Shepherdson of High Frequency Economics.
Of the 18 industries ISM surveyed, only four grew: Information; wholesale trade; utilities; and "other" services, which include smaller sectors such as advocacy, dry cleaning and machinery repair. Eleven industries were still shrinking, led by arts and entertainment, mining, retail and transportation. Three categories neither shrank nor grow in January: agriculture, construction and real estate.
Elements of the report suggested more growth in the future. New orders, a signal of business activity to come, picked up in January, expanding for the fifth straight month. Business activity also expanded in January, though more slowly than in December.
The report does show job losses moderating, with the employment index improving to 44.6 in January from 43.6 in December. Still, it's the 25th straight month of contraction in employment.
More sales for the country's hospitals, shops, retail, financial services companies or shippers should mean that service companies will be more inclined to hire. Service-sector jobs make up more than 80 percent of non-farm U.S. employment.
For now, the uncertainty of the economic recovery could be holding back companies from hiring despite a pickup in business, said Joel Naroff, president and chief economist at Naroff Economic Advisors.
ADP, a payroll company, reported Wednesday that 22,000 private non-farm jobs were cut last month. That was the fewest since employment started to decline in February 2008. But outplacement firm Challenger Gray & Christmas said employers cut payrolls by more than 71,000 workers, the biggest amount in five months.
The government is scheduled to report January employment data on Friday. Economists expect the Labor Department to say that employers added 5,000 jobs last month but that the unemployment rate rose to 10.1 percent from 10 percent in December.
Late last month, Wal-Mart Stores Inc. said it would cut about 11,200 jobs at Sam's Club warehouses as it turns over the task of in-store product demonstrations to an outside marketing company.