INSTANT VIEW: Services sector shrank sharply in October

NEW YORK (Reuters) - The service sector shrank unexpectedly sharply in October, according to a report released on Wednesday.

KEY POINTS: * The Institute for Supply Management said its non-manufacturing index came in at 44.4 versus 50.2 in September. * The level of 50 separates expansion from contraction. * Economists expected a reading of 47.5, according to the median of 75 forecasts in a Reuters poll which ranged from 42.0 to 50.5. * The services sector represents about 80 percent of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants.

COMMENTS:

ERIC KUBY, CHIEF INVESTMENT OFFICER, NORTH STAR INVESTMENT MANAGEMENT CORP., CHICAGO:

"The number was a little bit worse than expected but people were expecting it to be really bad. Short of a dramatic miss, I don't think you're going to get a big market reaction.

"The market is really discounting worse economic data than economists are predicting. I think they've started to price in a depression. If the economy really is going forward as bad as economists think, that actually would be a major positive for the market."

KATHY LIEN, DIRECTOR OF CURRENCY RESEARCH, GFT FOREX, NEW YORK:

"The key takeaway here is the large drop that we saw in the employment component of service ISM. That's what everyone is watching because there's a very decent chance that non-farm payrolls could drop by more than 200,000 on Friday and this employment number definitely confirms that."

ANTHONY NIEVES, CHAIRMAN OF THE ISM NON-MANUFACTURING BUSINESS SURVEY COMMITTEE, BEVERLY HILLS, CALIFORNIA:

"Everyone is trying to spend less and reduce expenses across the board and one thing that we always note is that the non-manufacturing sector is more labor intensive and that's a variable expense that companies always look to cut back and do without whenever they can. We are not expecting the employment index to rise over the next month or so. It's all related to how the economy is doing and that's not an overnight fix."

IAN SHEPHERDSON, CHIEF U.S. ECONOMIST, HIGH FREQUENCY ECONOMICS, VALHALLA, NEW YORK:

"The index was depressed by sharp declines in business activity, and orders, with smaller drops in supplier deliveries and employment. As far as we can tell the headline number is little more than a lagging indicator of core retail sales growth, which has plunged in the past few months. The employment number is more of a coincident indicator of the trend in private non-manufacturing payrolls and, if sustained at October's 41.5, it signals declines in excess of 200,000 per month. In short, horrible, but only to be expected in the wake of the equity plunge and the subsequent collapse in confidence. We don't expect the headline to drop much more."

WIN THIN, CURRENCY STRATEGIST, BROWN BROTHERS HARRIMAN, NEW YORK:

"All the economic numbers we had this week were pretty weak and today's reports were no surprise. Now that we are past the election, and Obama's victory was priced in, we might see the dollar bid easing a bit in the short term. That is related to a somewhat improved outlook on the credit crisis. On the longer run, we still expect the dollar to remain stronger in particular against European currencies."

JONATHAN BASILE, ECONOMIST, CREDIT SUISSE, NEW YORK:

"This all fits that economic activity slowed abruptly in October. All this suggests downside risk to growth. These are some of the worst readings for components. Things may improve from here, but what is driving them? Is it all due to the credit turmoil?"

"Having October being this bad, GDP will get noticeably worse in the fourth quarter."

MARKET REACTION: STOCKS: U.S. equity indexes pare losses. BONDS: Treasury debt prices pare gains. DOLLAR: U.S. dollar trims gains versus euro.