Service Sector Economy: Slower Growth But Strong Hiring

Source: http://www.flickr.com/photos/teegardin/

Source: http://www.flickr.com/photos/teegardin/

The Institute for Supply Management reported Monday that its index for service-sector business activity fell 0.9 points to 53 in December from 53.9 in November. The decline indicates that composite non-manufacturing business activity is still growing but at a slower rate than in November. Economists expected the index to increase to 54.8.

The non-manufacturing service sector accounts for the majority of U.S. economic activity, so the ISM report can be used to help diagnose the health of the overall business sector. In particular, market watchers have their eye on the business activity/production index, which fell 0.3 points to 55.2 in November, also indicating slower growth.

The bad news out of the ISM report is the 7-point decline in the new orders component, which landed in contraction territory at 49.4 for December. This is the first negative reading of the new orders component since 2009. There is some solace, though, in a 3.3-point gain in the employment index to 55.8. Growth may be mixed and decelerating, but the sector is still growing.

“Overall, we are still seeing the pickup in business which began in the 3rd quarter,” said a supply executive from the wholesale trade industry. The general trend, though, has been tempered by severe winter weather in many parts of the country. An executive from the arts, entertainment, and recreation industry reported that the weather “has had a major impact on businesses. Both customers and employees were unable to reach the workplace.”

Markit Economics also released its final service-sector purchasing managers’ index for December, and like the ISM report, it showed a deceleration in overall growth. The headline index fell from 55.9 to 55.7. However, Markit’s new business index expanded from 56.9 to 57.9, suggesting that there is still growing demand for services. Markit’s employment index also increased, climbing from 52.4 to 55.2.

“The U.S. economy appears to have ended 2013 on a strong note, especially in relation to hiring,” commented Markit chief economist Chris Williamson. “An upturn in the rate of job creation in the service sector, added to strong job gains in manufacturing, sets the scene for another upbeat non-farm payroll report for December. Another month of job gains of at least 200,000 looks likely.”

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