March 5, 2008 / 2:59 PM / 12 years ago

Service sector slump wears on; Fed sounds grim

NEW YORK (Reuters) - The slumping U.S. service sector and a weakening job market dealt further blows on Wednesday to an economy teetering on the brink of recession, while bad news continued unabated on the inflation front.

A sign at a landscape supply company advertises available jobs in Arvada, Colorado October 5, 2007. U.S. private employment fell unexpectedly for the first time in nearly five years in February, according to a private report on Wednesday that dealt another blow to an economy teetering on the brink of recession. REUTERS/Rick Wilking

The U.S. service industry shrank for a second month in February, though at a slower pace, according to a report by the Institute for Supply Management that showed more improvement than expected but still painted a weak picture overall.

The U.S. private sector unexpectedly shed jobs for the first time in nearly five years in February, according to a private report that does not bode well for the government’s key U.S. employment report on Friday.

The Federal Reserve said that all of its districts reported decelerating economic growth in early 2008, while prices pressed upward almost everywhere in the United States.

After the U.S. economy nearly ground to a halt in the fourth quarter of 2007 the Fed’s “Beige Book” report appears to increase the odds of a contraction and more interest rate cuts to cushion the fall, though this may add fuel to inflation.

“It looks pretty weak across the board,” said Robert Brusca, chief economist at Fact and Opinion Economics in New York. “It says that the Fed needs to and can continue to cut rates.”

There was more unwelcome news on inflation. While U.S. productivity in the fourth quarter was slightly better than earlier estimated, labor costs were also considerably higher, according to revised government figures.

Oil rallied $5 to a record near $105 a barrel. The Fed said upward pressure on prices from rising materials and energy costs showed up in almost all districts, but analysts see the Fed, the U.S. central bank, more focused on growth.

“The Fed is basically allowing inflation concerns to take a back seat to growth. But at some point ... we’re basically setting ourselves up for an inflation problem,” said William Larkin, fixed income portfolio manager with Cabot Money Management in Salem, Massachusetts.

On Wall Street, stocks ended a little higher. The dollar was mixed, gaining versus the yen but hitting another record low versus the euro EUR=.

Prices of government bonds, which benefit from weak economic data but suffer from inflation, fell.

A government report showed new orders at U.S. factories fell 2.5 percent in January. That was the first decline since August and comes after a separate report from ISM on Monday showed the U.S. manufacturing sector contracted in February.


Still, investors welcomed the news that the service sector was not as weak as expected and saw it as a rare bit of respite from the steady flow of woeful economic news in recent weeks.

The Institute for Supply Management’s non-manufacturing index came in at 49.3, above the record-low 44.6 in January but still slightly below the level of 50 that separates expansion from contraction. Economists had expected 47.0 for February.

The index has been below 50 for two consecutive months, the first such slump since January 2002, when the economy was still feeling the effects of the last recession.

Some were encouraged by the fact that the ISM’s separate business activity index for the service sector showed expansion, coming in at 50.8, above January’s 41.9. February’s jump was the biggest rebound in the business activity index since November 2001, the end of the last U.S. recession.

The service sector is crucial since it accounts for about 80 percent of U.S. economic activity. Both services indexes saw their biggest monthly falls ever in January.


The slew of data came as markets were gearing up for Friday’s government jobs report. Analysts expect it will show a rise of 25,000 in U.S. February non-farm payrolls, based on the median in a Reuters survey, but estimates range widely from a drop of 110,000 to a rise of 100,000.

After last month’s report showed U.S. payrolls shrank in January for the first time in nearly 4-1/2 years, economists are eager to see if this is repeated.

A fall of 23,000 private sector jobs in February, reported by ADP Employer Services compares with a downwardly revised 119,000 jobs added in January. It was the biggest drop since April 2003 and first monthly contraction since June 2003.

However, economic optimists may draw encouragement from news that planned layoffs by U.S. companies fell in February, according to Consulting firm Challenger, Gray & Christmas Inc.

Additional reporting by Mark Felsenthal in Washington and Richard Leong and Justin Grant in New York; Editing by James Dalgleish

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