US service sector growth slows

US service sector growth slows
By Daniel Pimlott in New York
Copyright The Financial Times Limited 2007
Published: March 5 2007 16:31 | Last updated: March 5 2007 16:31


The US service sector saw a sharp drop off in activity last month, growing at its slowest rate since during the Iraq war in April 2003, according to data released on Monday.

The Institute for Supply Management said that its index of business activity for the services sector stood at 54.3, down 4.7 percentage points from January.

The report badly missed economists’ forecasts of a level of 57.

New orders in the service sector were down 0.6 percentage points at 54.8. But figures on employment in service industries put a more positive gloss on the state of the economy as the index for non-manufacturing jobs rose 0.5 percentage points to 52.2.

The figures added to concerns surrounding the state of the US economy, but the markets did not react strongly when the data was released. Alan Greenspan, former chairman of the Fed, warned last week that a recession was “possible”.

Other data released last week showing that the US economy grew less quickly than expected last quarter and that industrial investment slowed at the start of the year worried investors and contributed to the chill in global markets.

The service industries covered by the report make up around 80 per cent of the US economy and are the driver of economic growth as manufacturing faces ongoing weakness in housing, and the auto industry continues to ail.

Some analysts said that although the headline figure of the report was probably somewhat misleading, in the current market conditions it was still worrying.

Alan Ruskin, chief currency strategist at RBS Greenwich Capital, called the numbers “disappointing, but the breakdown is not nearly as poor as the headline would suggest. Both the employment index and orders data were fairly close to the prior months numbers.”

But he said that the data would “only add to fears that the economy may be losing a little momentum, even allowing for the breakdown.”

“The headline index is usually little more than a lagging indicator of the rate of growth of core retail sales,” said Ian Sheperdson, chief US economist at High Frequency Economics. “Given the mood of the markets, however, and the uncertainty surrounding the economic outlook, the report does not look good.”

Others warned that the data supported the view that the US economy was heading for slower growth this year.

“With the escalation of pressures on the financial services industry connected with problems in the sub-prime mortgage lending market, the services industries are expected to track in the slow to moderate growth range for several more months,” said Brian Bethune, US economist at Global Insight. “For the economy as a whole, this points to “slow speed ahead” - with potentially rough seas and headwinds - in the first half of 2007.”