There goes the service sector (wasn't that supposed to be invincible?)
September 07, 2001
by Thomas Coyle
NEW YORK -- The service sector employs about 85 percent of Americans and accounts for something like 60 percent of gross domestic product.
So it was an unfortunate thing for fans of a strong U.S. economy that the National Association of Purchasing Managers Non-Manufacturing Business Index dropped like a rock last month.
Here's why
After all, consumer spending has been the big thing keeping the economy afloat through a sharp decline in manufacturing activity. Now, if the service sector comes meaningfully unhinged, unemployment -- already at or near recession levels -- could get worse and consumers might, either from fear or out of sheer necessity, start clamping their purses shut.
And that could prove fatal to the argument that we might -- by virtue, say, of the Federal Reserve's rate cuts -- still manage to keep ourselves from dipping into a full-blown recession.
Quite a surprise
The Service NAPM fell to an all-time low of 45.5 percent in August from 48.9 percent in July. On a scale where 50 percent divides growth from contraction, the service sector has shrunk in all but one of the past five months.
Worse still, the extent of the fall in service-sector business activity took the market unawares. Wall Street economists had been expecting an index reading of 49.5 percent.
Communication, real estate, wholesale trade, agriculture and construction industries reported the highest rates of decrease in business activity, according to Sean Ford, an associate economist with the Dismal Scientist. The industries reporting growth in business activity in August were insurance, entertainment and public administration.
Talk about timing
Though lower service-sector inventories and prices might, if a trend develops, set the stage for better business activity in months to come, sharp month-to-month deterioration in terms of new orders, exports and employment suggest that the non-manufacturing end of the economy still has months of struggle ahead of it before it claws its way back to meaningful and sustained growth.
The frustrating thing is that the service sector's precipitant weakness is becoming evident just as the manufacturing side of the economy is starting to show a bit of strength.
Vital signs
Last Friday, for instance, investors got two pieces of good news from that side of the fence.
New orders for U.S. manufactured goods rose 0.1 percent in July. That was a small uptick, certainly, but it seemed to beat hell out of the market's call for a drop of 0.5 percent.
The Chicago PMI was also better than expected. It came in at 43.5 percent in August, a decent move up from 38 percent in July.
Then on Tuesday, the Manufacturing NAPM -- though below 50 percent for the thirteenth month in a row -- was shown to have risen to 47.3 percent in August, its highest level since November. New order activity for manufactured goods was especially lively, moving into the growth zone for the first time this year.
But the odd, tiny -- and undoubtedly disputable -- sign of enhanced manufacturing activity won't prove much to build an economic recovery on -- not if the service sector's speeding contraction gets translated into job losses and boarded-up Main Street store fronts.
They noticed
Investors seemed to have a keen sense of the importance of the Manufacturing NAPM report, though warnings from technology companies like Manugistics (MANU) and Motorola (MOT) couldn't have helped matters.
The Nasdaq Composite Index gave up 3 percent on Thursday to close at 1,706 -- its lowest close since April 4, and its third worst finish this year. And, ominously enough, there was no late-day surge of "smart money" buying to offset intraday losses.
Setting last April aside, the Nasdaq hasn't seen depths like that since it put the Russian default/Long Term Capital Management crises behind it in the autumn of 1998. |
