Wed, 06 Feb 2008
Washington (ANTARA News) - The services sector of the US economy contracted for the first time in nearly five years in January, raising the odds that a recession is at hand, a widely watched survey showed Tuesday.

The Institute of Supply Management's index on nonmanufacturing activity slumped to 41.9 percent in January from 54.4 percent in December.

The report on services, which makes up the lion's share of US economic activity, is another sign of a sharp slowdown in the US economy that some analysts say means a recession is at hand.

"The extraordinary drop in the supply managers' view of the economy raises the distinct possibility that we are in a recession," said Joel Naroff, economist with Naroff Economic Advisors.

The report was the second shock piece of economic news in the past week. On Friday, the government reported the US economy lost 17,000 jobs in January in the first decline since 2003.

The ISM reading was the lowest since October 2001, when the US economy was in recession, and the first time in 58 months the index was below the level of 50 percent which indicates expansion, the ISM was quoted by AFP as saying.

The report was also well below analyst expectations of 53 percent.

Sal Guatieri at BMO Capital Markets said the survey, which measures almost nine-tenths of economic activity, "provides compelling evidence -- along with the decline in payrolls and a six percent slide in auto sales in January -- that the US economy is in recession."

The ISM also reported that a new composite business index showed retrenchment with a figure of 44.6 percent.

Several sub-indexes fell into contraction territory in January. ISM's new orders index for services fell to 43.5 from 53.9 in December, and the employment index fell to 43.9 from 51.8.

The business activity index also fell sharply to 41.9 from 54.4 in December, while supplier deliveries and inventories also fell below 50.

The prices index of 70.7 percent meanwhile showed strong inflation pressures.

ISM survey chief Anthony Nieves said corporate supply chiefs "also indicated that they are experiencing inflationary pressures. The overall indication in January is that nonmanufacturing has come to the end of a long-term period of growth and has contracted for the month of January."

Last week, the ISM's manufacturing survey released showed sluggish growth with an index of 50.7 percent.

Many economists say a recession, usually defined as two consecutive quarters of shrinking economic activity, is likely in 2008 as a result of a meltdown in the US housing market that has hit banks and finance companies hard.

The US economy expanded in the fourth quarter but barely -- at an annualized pace of 0.6 percent -- according to the government's estimate last week of gross domestic product (GDP).

The Federal Reserve has slashed interest rates sharply since September to bring the federal funds rate to 3.0 percent from 5.25 percent in an effort to stimulate flagging activity. Congress is also debating an economic stimulus plan.

Stephen Gallagher, economist at Societe Generale in New York, said the latest ISM services survey was "in recession territory."

"The plunge in the nonmanufacturing sector to such lows looks as though real GDP is turning negative after very sluggish growth at the end of 2007," Gallagher said in a note to clients. (*)



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