Services Sector Grows for Second Month

NEW YORK – A key barometer of the vast U.S. services economy registered growth for a second straight month in December, according to a report released on Friday, helping to solidify optimism the American economy may have already seen the worst of the current recession.

The Institute for Supply Management, an industry trade group, said its monthly non-manufacturing index, which measures the services sector of the economy, surged to 54.2 in December from 51.3 in November, beating Wall Street forecasts.

"I'm encouraged that this very likely is showing the beginning of a broad turnaround," said Ralph Kauffman, director of Tempe, Arizona-based ISM's non-manufacturing survey committee, in a teleconference with reporters.

A reading above 50 indicates growth in the services sector, which includes everything from transportation to legal and financial services. ISM's manufacturing index, which measures less than one-fifth of overall economic activity, has been mired below 50 for the past 17 months but showed a strong rebound in new orders in December, spurring recovery hopes.

The index hit 40.6, its lowest level since the survey's inception in the summer of 1997, after the Sept. 11 attacks.

"Although these data series have a relatively short history — only 4-½ years without a complete business cycle — they add to the evidence that the worst of the recession is over," said Steven Wood, chief economist at FinancialOxygen in Walnut Creek, Calif. "Economic recovery should begin in the first quarter."

Stocks extended earlier gains after the report was released while U.S. Treasuries, already sharply lower, foraged deeper into negative territory as investors became more optimistic about a recovery. The dollar shrugged off the report.

New orders rose to 52.6 in December from 48.3 in November, the report said, following a similar move in ISM's industrial survey, pointing to future growth in service sector businesses as those orders are filled.

The report said that after three months of recording the highest rate of decline in new orders, the transportation sector, one of the hardest hit by the Sept. 11 attacks, had the second-highest rate of increase in new orders during December.

New export orders also surged in December after two months of decreases, lifting the index to 55.0 from 48.5 in November.

The employment index also rose, but by very little, according to Kauffman, underscoring continuing weakness in the labor markets as the economy struggles to get its footing. The employment index edged up to 45.1 in December from 44.3.

ISM, formerly the National Association of Purchasing Management, compiles its diffusion index by surveying about 370 purchasing executives in more than 60 different service industries monthly.

ISM's manufacturing business index, conducted since the 1940s, is calculated through a weighted average of five subcomponents, including new orders, all of which are seasonally adjusted.

But the non-manufacturing index is calculated through a response to a question asking members if conditions are better, the same, or worse than in previous months. It is not a composite index of its components. ISM began seasonally adjusting the business activity, new orders, imports and employment indexes in January of this year.