Service Sector Growth Slips; Factory Orders Jump

Growth in the U.S. service sector slipped in November to its lowest since March, showing some parts of the economy were feeling the strain of upheaval in credit markets and the lingering housing downturn, according to a report released Wednesday.

But other reports showed surprisingly strong growth.  New orders at U.S. factories posted a surprisingly strong 0.5 percent increase in October, helped by more demand for defense and transportation equipment, and also were revised up for September in a Commerce Department report issued on Wednesday.

Separately, another government report showed U.S. worker productivity in the third quarter notched the strongest growth in four years on a cut-back in hours that curbed labor costs.

The Institute for Supply Management's services index fell to 54.1 last month from 55.8 in October, below economists' median forecast for a slip to 55.0.

The dividing line between growth and contraction is 50. The services sector represents about 80 percent of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants.

The new orders component slipped to 51.1 in November from 55.7 in October, the lowest since April 2003. The prices paid index, a gauge of inflation pressures, jumped to 76.5 from 63.5. The employment index slipped to 50.8 from 51.8. "I wouldn't make much of (this) drop ... It's not out of line with the ISM manufacturing index (released Monday)," said Cary Leahey, economist with Decision Economics in New York.

However he added: "You do have some signs of stagflation: a jump in prices paid, but a slowdown in orders and employment. The index is telling you that the economy is probably growing at about a 2 percent rate right now."

The services sector represents about 80 percent of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants.

Factory Orders Rise

Meanwhile, Wall Street economists surveyed by Reuters had forecast that October factory orders would be flat. Instead, not only were they up but the government said that September orders increased by a slightly stronger 0.3 percent rather than the 0.2 percent gain it estimated a month ago.

The October orders rise was the strongest since a 3.4 percent jump in July.

Excluding transportation, factory orders rose 0.6 percent in October. When defense orders were stripped out, factory orders were up 0.3 percent.

Non-defense capital goods order excluding aircraft, a proxy for business spending, fell a revised 2 percent in October after rising 1.4 in September.

Last week, the government had said in a report on durable goods orders that non-defense capital goods orders excluding transportation had fallen more steeply by 2.3 percent in October.

Orders for transportation goods were up 0.5 percent in October, although that followed a 6.9 percent plunge in September. Defense capital goods orders climbed strongly by 16 percent, partly reversing September's 26.8 percent drop.

CONTINUED : Good News: Inflation

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