Services Sector Pulls Back, Fanning Recession Fears

The U.S. services sector retrenched sharply in January to levels not seen since the 2001
recession, renewing fears about an economic slump, according to a survey released Tuesday.

Paul Sakuma / AP

The Institute for Supply Management's index of non-manufacturing plummeted to 41.9 from 54.4 in December, its largest monthly decline on record and a far greater drop than Wall Street expected. A Reuters poll of economists had produced a median expectation of a slip to 53.0.

Because the services sector accounts for more than three-quarters of the American economy, the sharp downturn is fanning worries that the recession is already here.

"The recession has indeed arrived," said Jane Caron, chief economic strategist at Dwight Asset Management in Burlington, Vermont.

A reading below 50 indicates contraction, and bond prices jumped as the figures reinforced investors' conviction that the U.S. economy is already in recession. Stocks sold off.

Analysts said the gloom surrounding the services report justified the Federal Reserve's recent steep interest rate cuts. The Fed slashed rates by 1.25 percentage points in the past two weeks, a rare strong dose of stimulus over such a short period.

The employment index fell to 43.9 from 51.8, corroborating last week's dire U.S. payrolls report, which showed the first net monthly contraction in the labor market in more than four years.

Weakness was evident across the board. A measure of new orders fell to 43.5 from 53.9.

"It's another recession marker on the radar screen," said Cary Leahy, economist at Decision Economics in New York.

"An absolutely stunning ISM non-manufacturing number leaves the chart of the index looking like it has fallen off the edge of a cliff, and is heartwarming only for those who think the
economy is already in a recession," said Alan Ruskin, strategist at RBS Greenwich.

But analysts cautioned that the short history of the index -- it has only been published since July 1997 and so has not actually measured a deep recession -- was reason to expect that
perhaps some of the weakness was overstated.

"It seems clear that the economy has slowed in recent months: however, we will need to see much more in the way of supporting evidence before we believe that growth has slowed as
much as this series suggests," said Drew Matus, economist at Lehman Brothers in New York.

A downturn that began in the U.S. housing sector about two years ago has spread to banks, which made many loans to sketchy borrowers and are now grappling with rising mortgage defaults.

Lately, it is the consumer that appears to be throwing in the towel. Still, weekly chain store sales did paint a mixed picture in the latest week, with Redbook Research reporting a
0.4 percent decline, but the International Council of Shopping Centers registering a 1.7 percent rebound.

ISM said the data, which are based on a survey of 370 purchasing managers in the services sector, were published ahead of the normal 10 am ET release time and ahead of the Wall Street stock market open because of concerns that the data may inadvertently have been released late on Monday.

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