Print

Mail

wiki links

Service sector in US begins to shrink

ISM survey results * New orders index shrank, with the index sliding to 47.7 points in March from 53 in February. * Jobs were shed at a faster rate. The employment index fell to 47.9 from 49. * The backlog of orders index declined, with the index slumping to 47.5 points in March from 50 in February.

The Iraq war stunned US businesses into partial paralysis, shrinking the vast service sector for the first time in 14 months and feeding jobless queues, data showed yesterday.

The weakness fuelled recession fears.

"It is not a pretty picture for the US economy," said BMO Financial Group economist Sal Guatieri.

"The longer the war lasts, the greater the risk of a recession." The risk of recession stood at about 40 percent, he estimated.

The Institute for Supply Management (ISM) said its index of non-manufacturing activity, based on a survey, slumped to 47.9 points in March from 53.9 points in February.

It was the first drop below 50 points, the line that separates contraction and expansion, since January 2002.

"We already knew manufacturing has been weak, undermined by a soft global economy and weak exports. Now the services industries are also being whacked by all the uncertainties relating to war," Guatieri said.

"There is really no good news in the report."

The ISM survey quoted companies fretting about the Iraq war.

Comments from top executives, asked about the cause of the weakness, included: "Impending war outbreak in Iraq and negative impact on economy in short term" and "Uneasiness on consumers' part, economy, stock market, war. People are uncertain and holding back."

The queue of new claimants for US unemployment benefits, meanwhile, shot to a one-year high last week.

The number of initial claims leapt by a higher-than-expected 38,000 to 445,000 people in the week to March 29 when compared to the previous week, seasonally adjusted figures showed.

It was the largest total since the week to April 13, 2002.

"It looks like businesses in the United States are at a standstill with respect to their hiring decisions until the fog of uncertainty relating to the war clears up," Guatieri said.

"That presents a sizable downside risk to the outlook for consumer spending and the economy going forward."

Federal Reserve policymakers may be forced to lower interest rates, already at a four-decade low, Naroff Economic Advisors president and chief economist Joel Naroff said.

"They have got to give this war a little bit longer, especially as we close in on Baghdad," Naroff said. But "if it becomes street fighting, they are going to probably move."

The Federal Open Market Committee is next due to meet May 6, but several economists are expecting the policymakers to move before then if the war gets bogged down.

"We have got clear concerns about the state of the economy at this point," Naroff said.

"People are always asking: 'Is it the economy or is it the war?' Well, you cannot separate them any more. If the war changes, the economy will come back."

Wall Street shot higher at the opening bell as investors cheered news that US forces were closing in on Baghdad but the strength collapsed in the face of the weak data.

The Dow Jones industrial average of 30 top stocks fell 44.68 points or 0.54 percent to close at 8,240.38.

The service industry had already started to slip slightly before the war, said Wells Fargo Banks chief economist Sung Won-sohn.

"Since the war has started, more and more consumers are postponing or cancelling vacation plans, cutting into profits for the tourism, airline and hotel industries," he added.

"Since services make up about 75 percent of the economy, today's report is a grim indication that the economy may be starting to move in the wrong direction."
This story has been viewed 1646 times.