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Half Of U.S. Services Businesses Say Things Are Getting Worse

The stock market weakened Thursday morning after a weak report from the Institute for Supply Management on the health of the service sector of the U.S. economy. And weaken it should: under the ISM's classifications, services, or more precisely non-manufacturing concerns, contribute nearly 90 percent of the GDP that comes from the business sector, and about two-thirds of industries reported weaker results.

New orders for services weakened, off a half-point from October with an index reading of 55, and overall business activity dropped to 49.6, almost six points lower. In other words, more than half of the companies in the survey said business was getting worse than getting better.

Service sector employment rose a half-point, but at 41.6 is still in contraction. The November report is all the more disappointing because indicators in services had generally ticked up in the three preceding months.

The slowdown in services contrasts with four months of reading over 50 in the U.S. manufacturing sector, according to a companion report from the ISM Monday. (November, however, was down from October.)

From an industry viewpoint, two-thirds saw deteriorating conditions. Paraphrasing the ISM's press release:

The six industries reporting growth in November: Other Services, Health Care & Social Assistance, Construction, Finance & Insurance, Retail Trade, and Information.
The 11 industries reporting contraction in November are: Real Estate Rental & Leasing, Management & Support Services, Mining, Arts, Entertainment & Recreation, Public Administration, Accommodation & Food Services, Educational Services, Wholesale Trade, Transportation & Warehousing, Professional, Scientific & Technical Services, and Utilities.
In the global economy, the expansion in services slowed to near a halt, according to JPMorgan, which compiles an index from reports from supply managers around the world, and produces succinct monthly reports thereon. The November reading came in at 50.1, measuring slight growth, down from a healthier 53 in October.

David Hensley, who is Director of Global Economics Coordination for JPMorgan, managed to put a positive spin on the global report:

The global PMI points to a setback in the service-sector recovery in November. However, with new orders continuing to rise and global indicators of final demand on the rise, this is expected to be only a temporary pause in growth.
Reports within the overall index showed that services employment continues to contract worldwide as well, especially in Spain, Ireland, the U.S. and France. To make matters worse, prices paid by services companies rose in November for the second month, and at a faster pace. New orders are expanding, but at a slower rate than October, and global service backlogs are shrinking.

Today's services report got the stock market's attention, but that's not always the case. I called David Hensley at JPMorgan to ask why, even though services account for 88 percent of U.S. business activity, it's the manufacturing indexes released on Monday that get the most ink.

The service indexes have not been tracked as long as the manufacturing data, he said, only about 10 years, and the observations tend to be more volatile, so the service sector indexes are orphans.

But it's not as though we don't get any read on services, he pointed out, because the production index for manufacturing and counterpart business activity index for services tend to move together closely. (For readers who are statistics fans, the correlation is 0.75 for the monthly observations from mid-1997 through November 2009.)

Whether the stats are reliable or not, the downturn seems widespread on an enormous slice of the U.S. economy.

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