ISM Services Index Fell More Than Forecast in January (Update3)
By Shobhana Chandra
Feb. 5 (Bloomberg) -- U.S. service industries unexpectedly shrank in January at the fastest pace since the last recession as the housing slump deepened and consumer spending cooled.
The Institute for Supply Management's non-manufacturing index, which reflects almost 90 percent of the economy, fell to 41.9, the lowest since October 2001, from 54.4 the prior month, the Tempe, Arizona-based ISM said. A reading of 50 is the dividing line between growth and contraction.
``This is a stunning fall,'' said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. ``If accurate, it's dire news on the economy.''
The worst housing slump in a quarter-century is spreading throughout the economy, hurting businesses such as builders, retailers, wholesalers and mortgage lenders. The report adds to concern Americans are spending less as job losses mount, raising the risk the economy may tip into a recession, economists said.
The group issued the report more than an hour earlier than scheduled. The release time was moved up because of concerns about a possible ``breach'' of embargoed information in the report, ISM spokeswoman Andrea Waas said in a telephone interview.
The index was projected to fall to 53, the median forecast in a Bloomberg News survey of 65 economists. Estimates ranged from 51 to 55. The index has averaged 57.6 since its inception in July 1997.
New Composite
Today's report included a new composite index to reflect changes in current measures of business activity, new orders, employment and supplier deliveries. The contribution from each sub-index is equal.
The new composite index was 44.6 in January. It would have been 53.2 in December, according to Bloomberg calculations based on a formula provided by ISM.
Treasuries climbed and stock-index futures slumped as the release added to speculation the U.S. is falling into recession. Ten-year yields fell to 3.53 percent at 9:48 a.m. in New York, from 3.65 percent late yesterday. Standard & Poor's 500 stock index was down 2 percent to 1,353.
Europe's service industries expanded at the slowest pace in more than four years and retail sales fell the most since 1995, signaling that the region's economy may follow the slump in the U.S., reports today also showed.
Europe Slows
Royal Bank of Scotland Group Plc said its January purchasing managers' index for services dropped to 50.6, the lowest since July 2003, from 53.1 in December. December retail sales in the euro region declined 2 percent from a year earlier, the biggest drop in 13 years, according to the European Union's statistics office.
The ISM group's index of new orders for non-manufacturing industries fell to 43.5 from 53.9 the prior month.
An index of employment dropped to 43.9 from 51.8, and a gauge of supplier deliveries decreased to 49 from 52.5.
A measure of prices paid also dropped to 70.7 from 71.5.
The housing recession is hurting other parts of the economy. Employers in January reduced payrolls for the first time in more than four years, the Labor Department reported last week. Service providers added 34,000 workers to payrolls after an increase of 143,000 in December. Builders trimmed staff by 27,000 workers.
``Risks to growth remain,'' Federal Reserve policy makers said Jan. 30 when they cut the benchmark interest rate by a half point. The action followed an emergency three-quarter-point reduction the prior week. Investors are betting policy makers will lower the rate by another half point next month, according to futures trading.
Factories Expanded
Manufacturing, which accounts for about 12 percent of the economy, unexpectedly expanded in January, showing business investment is holding up even as other areas weaken, according to a report from ISM last week.
Economic growth slowed to an annual rate of 0.6 percent in October through December, down from a 4.9 percent pace in the third quarter, according to government figures last week.
Residential construction dropped in the fourth quarter by the most in 26 years, making the housing recession the worst since 1982.
Consumer spending may provide less support to the economy as property values fall and unemployment increases, economists said. Auto sales slumped last month to the lowest level in more than two years, according to industry figures issued last week. Total spending increased in December at the slowest pace in six months.
Sears Holdings Corp. last week ousted Chief Executive Officer Aylwin Lewis after a drop in holiday sales, and Home Depot Inc., the world's largest home-improvement chain, cut 10 percent of the workforce at its Atlanta headquarters.
``Sales levels are still depressed,'' Pulte Homes Inc. Chief Executive Officer Richard Dugas said on a conference call. The Bloomfield Hills, Michigan-based homebuilder reported its fifth consecutive quarterly loss on Jan. 31.
