U.S. Economy: Service Industries Unexpectedly Shrank (Update4)
By Shobhana Chandra
Feb. 5 (Bloomberg) -- U.S. service industries unexpectedly contracted in January at the fastest pace since the 2001 recession as the housing slump deepened and consumer spending cooled.
``This is a stunning fall,'' said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. ``If accurate, it's dire news on the economy.''
The Institute for Supply Management's non-manufacturing index, which reflects almost 90 percent of the economy, fell to 41.9, from 54.4 the prior month, the Tempe, Arizona-based ISM said. A separate report today by Royal Bank of Scotland Group Plc showed Europe's service industries grew in January at the slowest pace since 2003.
Stocks fell and Treasury notes rallied as traders added to bets that the Federal Reserve will cut its benchmark rate by another half a percentage point at or before its March meeting. Jeffrey Lacker, the president of the Richmond Federal Reserve Bank, said today that further reductions may be needed, citing the risk of a ``mild recession.''
Today's reports also show the economic slowdown that began with a U.S. housing downturn is jeopardizing Europe's expansion and increasing pressure on the European Central Bank to follow the Fed and cut rates.
`Further Easing'
``The prominence of downside risks means that further easing ultimately may be warranted,'' Lacker said in a speech to bankers in Charleston, West Virginia.
Odds of an emergency rate cut rose after today's ISM release, Merrill Lynch & Co. economists said in a note. Policy makers next meet on March 18. Last month, Chairman Ben S. Bernanke and his colleagues lowered the main rate three-quarters of a point eight days before they gathered Jan. 29-30.
``This keeps the Fed in aggressive rate cutting mode with a strong chance of an inter-meeting move possible before the March 18'' meeting, Merrill economists Sheryl King and David Rosenberg wrote.
The ISM published the data, which assesses retailers, banks and construction companies, more than an hour earlier than scheduled. The release time was changed because of concerns about a ``breach'' of embargoed information, ISM spokeswoman Andrea Waas said in a telephone interview.
`Possible Breach'
``The possible breach was very general information disclosed during a private conversation by someone who is normally not involved in the report process but was involved this month due to unique circumstances,'' Waas wrote later in an e-mailed response to questions. ``It was an innocent slip of the tongue.''
The index was projected to fall to 53, the median forecast in a Bloomberg News survey of 65 economists. Estimates ranged from 51 to 55. A reading of 50 is the dividing line between growth and contraction, and the index has averaged 57.6 since its inception in July 1997.
American Express Co. and Wendy's International Inc. have been among companies reporting profit has been hurt by the economic slowdown.
``The economy is shrinking,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. ``How much is still uncertain.''
The yield on the benchmark 10-year Treasury note fell to 3.57 percent at 4:11 p.m. in New York, from 3.64 percent late yesterday. The Dow Jones Industrial Average dropped 2.9 percent to 12,265.13. Equities also retreated in the U.K., Germany, France and Italy.
Global Index
A worldwide purchasing managers index covering all industries dropped to 47.7 in January, also the lowest since the 2001 recession, according to calculations by economists at JPMorgan Chase & Co. in New York.
``The global economy flirted with recession last month,'' JPMorgan economist David Hensley wrote in a note. Still, the index may overstate the degree of weakness because it doesn't include a services component from emerging countries like China and India which are likely still expanding, he said.
The Royal Bank of Scotland said its euro-region purchasing managers' index for services dropped to 50.6, the lowest since July 2003. Retail sales in the euro region declined 2 percent in December from a year earlier, a record, the European Union's statistics office in Luxembourg said today.
New Measure
Today's U.S. services report included a new composite index to reflect changes in current measures of business activity, new orders, employment and supplier deliveries. The contribution from each sub-index is equal.
The new composite index was 44.6 in January. It would have been 53.2 in December, according to Bloomberg calculations based on a formula provided by ISM.
The ISM group's index of new orders for non-manufacturing industries fell to 43.5 from 53.9 the prior month.
An index of employment dropped to 43.9 from 51.8, and a gauge of supplier deliveries decreased to 49 from 52.5.
A measure of prices paid also dropped to 70.7 from 71.5.
The housing recession is hurting other parts of the economy. Employers in January reduced payrolls for the first time in more than four years, the Labor Department reported last week. Service providers added 34,000 workers to payrolls after an increase of 143,000 in December. Builders trimmed staff by 27,000 workers.
Wendy's, a U.S. hamburger chain, yesterday said fourth- quarter profit rose less than analysts estimated as sales dropped at restaurants open at least 15 months.
Wendy's Outlook
``The first part of 2008 looks challenging due to economic headwinds and rising commodity costs,'' Chief Executive Officer Kerrii Anderson said on a conference call with analysts.
American Express, the third-largest U.S. credit-card network, said last month that fourth-quarter profit fell as it set aside more for customer defaults.
Manufacturing, which accounts for about 12 percent of the economy, unexpectedly expanded in January, showing business investment is holding up even as other areas weaken, according to a report from ISM last week.
Economic growth slowed to an annual rate of 0.6 percent in October through December, down from a 4.9 percent pace in the third quarter, according to government figures last week.
To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net
Last Updated: February 5, 2008 16:18 EST |
