US Service sector grows in Sept., 1st time in year

The U.S. service sector grew in September for the first time in 13 months, an encouraging sign for the fledgling economic recovery, although jobs remain scarce.

The Institute for Supply Management said Monday that its service index hit 50.9 last month, up from 48.4 in August. Analysts polled by Thomson Reuters had expected a reading of 50, the dividing line between growth and contraction.

The index, which tracks more than 80 percent of the country's economic activity, including hospitals, retailers, financial services companies and truckers, hadn't grown since August 2008.

The good news:
-- The new orders index, an indicator of future activity, jumped to 54.2 in September from 49.9 a month before, the first growth reading in a year.
-- Businesses' backlog of orders grew for the first time in 14 months.
-- Present business activity rose to 55.1 from 51.3 in August, growing for the second straight month after 10 straight contractions.

The ISM report is based on a survey of the institute's members in 18 industries and covers indicators such as new orders, employment and inventories. Five industries grew last month: utilities, health care, retail, construction and wholesale trade. And while activity is rising, only three areas reported an increase in jobs: health care, support services for companies and educational services.

Overall, service-sector employment shrank in September, though at a slightly slower pace than in August. The survey's reading of 44.3, up from 43.5, was the 20th month of contraction in 21 months.

"Better, but still terrible," Ian Shepherdson, chief U.S. economist for High Frequency Economics, wrote in a research note.

Other analysts said any hiring tends to lag increased production.

"We won't likely see increased hiring until January," even if business and new orders keep rising this fall, said Bank of America Merrill Lynch economist Ethan Harris.

"Businesses are more reluctant than in the past to start the hiring process. They really do take the 'prove it to me' attitude" that the recession is over and demand is increasing, he said.

Last week, for example, Little Rock, Arkansas-based telecom services provider Windstream Corp. said it would cut 350 jobs, or 5 percent of its work force, this year.

Despite the overall growth, the chair of the ISM's service survey committee was not "overly excited" about September's report and said several months of increases are needed to establish a pattern of recovery.

"This has to be sustainable," Anthony Nieves said on a conference call with reporters.
The service sector is dependent on consumer spending, which powers about 70 percent of the economy. While Americans' spending rose 1.3 percent in August, the best showing since October 2001, a third of that gain came from the government's now-ended Cash for Clunkers program. The government also reported that incomes rose only 0.2 percent in August.

"We're in this kind of twilight zone of very soft recovery," Harris said.