- The Washington Times - Monday, October 5, 2009

Economic activity in U.S. service industries expanded in September for the first time in more than a year, indicating that the nation’s nascent recovery that began in the housing and manufacturing industries may be becoming more broad-based.

But service-sector employment remained weak last month, a factor that economists said could significantly dampen the vigor of the emerging recovery, especially in terms of consumer spending.

The Institute for Supply Management’s (ISM) index for the non-manufacturing sector jumped to 50.9 in September from 48.4 in August, surpassing the expectations of most economists. The service sector accounts for more than 85 percent of U.S. economic activity.

“Service industries burst into a general expansion mode in September for the first time in 13 months,” said Brian Bethune, chief U.S. financial economist for IHS Global Insight.

It was the first time since August 2008 that ISM’s non-manufacturing index exceeded 50. Readings above 50 indicate expansion, and readings below 50 reveal contraction.

“For the economy to sustain growth, the non-manufacturing survey will need to rise firmly above 50,” said Ryan Sweet of Moody’s Economy.com, whose forecast calls for gross domestic product (GDP) to increase at an annual rate of 3 percent during the third quarter and 2 percent in the fourth.

U.S. GDP contracted by 0.7 percent during the second quarter after plunging by 5.4 percent in last year’s fourth quarter and 6.4 percent in this year’s January-March period.

Significant gains in the service-sector index were achieved in business activity, which increased from 51.3 in August to 55.1 in September, and new orders, which jumped from 49.9 to 54.2.

“Both indexes are now at their highest levels since before the recession began [in December 2007] and suggest that businesses outside of manufacturing are transitioning from recession to recovery,” said Tim Quinlan, an economic analyst at Wells Fargo Securities.

Service industries experiencing expansion last month included utilities, health care and social assistance, retail trade, construction and wholesale trade, the ISM report said.

However, the service-sector employment index continued to remain significantly below 50 after a modest 0.8 point increase to 44.3.

“The employment index is weak and points toward a very slow improvement in the labor market,” said Mr. Sweet. “Labor market conditions are critical for a self-sustaining recovery to take hold.”

On Friday, the Labor Department reported that the U.S. economy shed 263,000 jobs in September, including nearly 150,000 jobs from service-providing firms. August job losses totaled 201,000. Since the recession began in December 2007, the economy has lost more than 7.2 million jobs as the unemployment rate has doubled from 4.9 percent in December 2007 to 9.8 percent last month.

“If the economy continues losing 200,000 jobs per month, it will undermine both consumer sentiment and spending,” Mr. Sweet warned. Consumer spending accounts for about 70 percent of GDP.

ISM’s September non-manufacturing survey included a question about the $787 billion economic-stimulus package that Congress passed in February. Fifteen of the 18 non-manufacturing industries said they expected to derive some benefit from the stimulus program, ISM said.

Last week, ISM reported that its manufacturing index exceeded 50 for the second month in a row. But it declined slightly from 52.9 in August to 52.6, disappointing investors and economists.

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