Services sector tanks, market off 370 points
A key index for January dipped well below the level of the 2001 recession. "A very bad report," one economist said.
NEW YORK - For the first time in nearly five years, the nation's services sector - including restaurants, travel, banking, construction and retail - contracted in January, stoking rising worries of a recession.
A report by the Institute for Supply Management (ISM), released yesterday, shook the stock market and wiped out the optimism about the nation's economy that sent stocks up last week. The Dow Jones industrial average fell 370 points, or nearly 3 percent. It was the biggest drop for the index since August. Nasdaq and the Standard & Poor's 500 index were down more than 3 percent each.
"This is an absolute collapse of this index," Nigel Gault, chief U.S. economist at Global Insight, said of the services report.
The measure by ISM - a nonprofit organization focused on supply-management professionals - of nonmanufacturing business activity fell to 41.9 in January from a revised reading of 54.4 in December. A reading above 50 indicates expansion, while below 50 indicates contraction.
Economists surveyed by Thomson Financial/IFR had expected a slight slowdown but had still forecast growth, with a median estimate for the index of 53.
The consensus among survey respondents was that the services sector, which accounts for about two-thirds of the economy, has "come to the end of a long-term period of growth," said Anthony Nieves, chairman of the ISM's committee that surveys nonmanufacturing businesses.
Gault said that in March 2001, the beginning of the last recession, the index had a reading of 50 and that during that recession, the index hung around 48 or 49 - several points higher than January's reading.
"This is a very bad report," Gault said. "I think it will be tipping plenty of people over the edge" into believing the nation is in a recession or heading for one.
Price increases have slowed for service companies, while their costs are up, said Nieves, who is also senior vice president for supply management at Hilton Hotels Corp. Survey respondents cited fears that a recession was taking hold, high energy prices, and worries over inflation and the housing market.
ISM said that only three service industries reported growth, while 14 showed contraction. The three - utilities, professional services and educational services - include more crucial needs such as doctor visits.
Meanwhile, cutbacks in less-essential spending have dragged down such segments as arts and entertainment, fishing and hunting, and lodging and food services.
Two measures that fell were those for new orders and employment, which Nieves said were more forward-looking - so their drops could indicate more trouble ahead. New orders fell to 43.5 while employment fell to 43.9.
"That's not instilling any confidence in me that we're going to see any real strong uplift," he said.