Service Sector Starts Year Off On Strong Note

The U.S. service sector expanded at a faster rate in January than in the previous month, a trade group said Monday, signaling a strong start to economic growth this year.

The Institute for Supply Management, which is based in Tempe, Ariz., said its index of business activity in the service sector advanced to 59.0 in January from 56.7 in December. Wall Street analysts had expected a reading of 57 for the latest month.

A reading above 50 indicates expansion, while one below that indicates contraction.

The growth was marked by steady levels of new orders and a decline in the prices paid by service companies.

The increase resulted in the index showing its 46th consecutive month of rising levels of business activity, the trade group said.

The service industries covered by the ISM report represent about 80% of the nation's economic activity, and economists are looking for the sector to be a driver of growth in 2007 as the manufacturing sector struggles with weakness in the automotive and housing industries.

The ISM's latest report on the manufacturing sector had shown that part of the economy contracting in January.

"Manufacturing is weakening as domestic auto manufacturers cut back and as residential construction declines," said Mark Vitner, senior economist at Wachovia Securities in Charlotte, N.C. "The growth is in non-manufacturing."

"The message to take away from the two is that economic growth will slow, but there will be growth," Vitner said.

Still, some economists expect the stronger-than-expected headline number masks some slower growth within the report.

"This is a pretty strong number," said Malcolm Polley, chief investment officer at Stewart Capital Advisors LLC, in Indiana, Pa. "If you don't look at the underlying components you would probably be led to believe that it is going to put some pressures on the employers' side of the
economy, potentially leading to higher inflation."

However, the new orders index was essentially flat at 55.4 compared with 55.6 in December. The employment index fell to 51.7 from 53.2. The prices paid index fell to 55.2 from 59.7 in December.

"The fact that you saw a little bit of moderation in the prices paid component helped temper that (view) to a certain degree," Polley said.

Some of the respondents told the trade group that "costs are starting to come down -- especially petroleum-related costs," the study said.

According to the survey, the picture brightened for seven industries, led by utilities and transportation. Three sectors held steady, while seven sectors shrank.