Crescenzi: Laggard Service Sector Hurting Job Market

Today, the Institute for Supply Management reportedthat its non-manufacturing index, an index designed to gauge conditions in the service sector, increased to 53.2 in September from 51.5 in August, exceeding forecasts for a reading of 52.0. This strength must continue if the U.S. job situation is to improve.

Here's why.

Roughly 112 million of the 130 million U.S. jobs are in the service-producing sector.

retail sales
Steven Puetzer | Getty Images
retail sales

Personal spending on services has been very weak, with no quarter seeing a growth rate of more than 2 percent in any quarter in 3 1/2 years.

In contrast, personal spending on durable goods has run at a 6.0 percent pace over the past six quarters (employment in the durable goods sector, a sector that has not been hiring for 30 years, employs a relatively small 9 million workers).

The composition of spending therefore must shift away from stuff, toward services.

When it does, employment gains will likely improve.

The ISM's non-manufacturing index during economic expansions tends to run about 3 points above the ISM's manufacturing index. The opposite has been true since June 2009, with the non-manufacturing index below the manufacturing index every month since then, by about 3.5 points.

This condition must flip if the U.S. is to see better job growth. Hence, so long as the ISM's non-manufacturing index gains, any slippage in the ISM's factory index will matter less because this is the sort of compositional change to economic that the U.S. needs—the service sector is where the jobs are.

Tony Crescenzi is Senior VP, Strategist, Portfolio Manager Pimco. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."