U.S. service sector activity contracts in April -ISM

WASHINGTON, May 5 (Reuters) - The U.S. services sector contracted for the first time in nearly 10-1/2-years in April as orders plunged, which could strengthen economists’ views that the economy would struggle to rebound from the novel coronavirus-driven recession.

The Institute for Supply Management (ISM) said on Tuesday its non-manufacturing activity index fell to a reading of 41.8 last month, the first contraction since December 2009. It was also the lowest level since March 2009 and followed a reading of 52.5 in March.

A reading below 50 indicates contraction in the services sector, which accounts for more than two-thirds of U.S. economic activity. Economists polled by Reuters had forecast the index dropping to a reading of 36.8 in April.

The smaller-than-expected decline in the non-manufacturing index reflected a jump in the survey’s measure of supplier deliveries to a reading of 78.3 last month from 62.1 in March.

A lengthening in suppliers’ delivery time is normally associated with strong economic activity and demand, which would be a positive contribution. In this case, however, slower supplier deliveries indicate supply shortages. The ISM reported last Friday that manufacturing activity plunged to an 11-year in April.

The economy is reeling from nationwide lockdowns to slow the spread of COVID-19, the respiratory illness caused by the coronavirus. The government reported last week that gross domestic product declined at a 4.8% annualized rate in the first quarter, the steepest pace of contraction in output since the fourth quarter of 2008.

Economists believe the economy entered recession in the second half of March when the social distancing measures took effect. The National Bureau of Economic Research, the private research institute regarded as the arbiter of U.S. recessions, does not define a recession as two consecutive quarters of decline in real GDP, as is the rule of thumb in many countries. Instead, it looks for a drop in activity, spread across the economy and lasting more than a few months.

Though some parts of the country have started to reopen, economists did not see the economy quickly returning to pre-pandemic levels, which they said would take years. Reopening the economy also involves the risk of a second wave of infections and further lockdowns.

The ISM survey’s measure of new orders for the services industry dropped to a reading of 32.9 in April, the lowest since the series started in 1997, from 52.9 in March. The survey’s index of services industry employment tumbled to 30.0 last month, also the lowest reading since 1997, from 47.0 in March.

The plunge in the employment measure fits in with economists’ expectations of historic job losses in April. A record 30.3 million Americans have filed for unemployment benefits since March 21, equivalent to nearly one out of every five workers losing their job in just over a month.

According to a Reuters survey of economists, nonfarm payrolls are forecast to have tumbled by a record 21.853 million in April. The unemployment rate is predicted to surge to 16%, shattering the post-World War Two record of 10.8% touched in November 1982.

In March the jobless rate shot up 0.9 percentage point, the largest monthly change since January 1975, to 4.4%. The government will release the closely watched employment report for April on Friday. (Reporting By Lucia Mutikani Editing by Chizu Nomiyama)