economic-retreat-services-sector-shrinks-unexpectedly-in-novemberThe U.S. economy hit an unexpected pothole on the road to recovery last month, as the Institute for Supply Management's Non-Manufacturing Index fell to 48.7 in November from 50.6 in October, the ISM announced Thursday. Readings above 50 indicate an expansion; below 50, a contraction. It was the first time in three months that this index, also known as the services index, indicated that the sector was contracting.

What's more, the index's closely-watched business activity component also declined, falling for the first time in four months, to 49.6 in November from 55.2 in October. The business activity component totaled 55.1 in September and 51.3 in August. The consensus of economists surveyed by Bloomberg News had been that the services index would total 52.0 in November. The index totaled 50.9 in September and 48.4 in August. It hit a low point of 37.4 in November 2008.
Economists, executives, and market analysts closely-monitor the business activity component of the services index because the survey does not contain a composite index, unlike the ISM's manufacturing index.

Meanwhile, the new orders component also dipped but remained above the 50 expansion/demarcation line, edging 0.5 lower to 55.1 in November from 55.6 in October. The new orders component was at 54.2 in September and 49.9 in August.

Respondents Concerned About Credit, Recovery's Strength

In November, respondents to the services survey offered the following comments, by sector: "Capital markets remain very tight; lenders are not releasing funds for development, limiting expansion" (accommodation & food services sector); "No one trusts that the recovery is real. Seems everything and everyone is in a holding pattern" (public administration sector); "U.S. business remains better than 2007 levels, although it's been through personnel and cost reductions that we are now profitable. Business continues to be about 8% below 2008 levels" (real estate, rental and leasing sector); "Business is still flat" (wholesale trade sector); "Fourth quarter still looking grim, but potential upturn for Q1 2010" (professional, scientific, and technical services sector).

Investors should monitor the ISM services index due to the large role services play in the U.S. economy and trade. The non-manufacturing survey polls about 400 firms in 60 sectors.

Economic Analysis

This was a disappointing services sector report on several counts. In addition to the top-line index dropping below the 50 expansion/contraction line, the business activity component also dipped below 50. The main bright spot? The new orders component -- an indicator of future demand -- remained above 50. Further, respondents' comments reflected the embryonic, uneven quality of the current economic recovery, as well as uncertainty regarding its "legs" -- or ability to become a self-sustaining, balanced expansion. Businesses have noted an increase in demand, but they're still citing a lack of adequate credit. In general, the picture is one of a mild U.S. economic expansion, with uneven performance and uncertainty regarding future demand. This is the first bearish economic data point in about two weeks, and although economists are careful to note that it's only one month's evidence, it does send a signal that more work must be done to improve credit availability to businesses.

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