Text size:

ISM: Service sector shrank for 6th straight month in March; pace of contraction accelerates

TALI ARBEL | AP Business Writer

10:40 AM EDT, April 3, 2009

NEW YORK (AP) — A private trade group's measure of the strength of the services sector shrank for the sixth straight month in March, and at a faster pace than expected, as job losses mount.

A services index from the Institute for Supply Management, a Tempe, Ariz.-based trade group of purchasing executives, fell to 40.8 last month from 41.6 in February. Economists surveyed by Thomson Reuters expected the index to edge up to 42.

Any reading below 50 indicates contraction.

"We haven't stopped free-falling," said Joel Naroff, president of Naroff Economic Advisors.

The report is based on a survey of the institute's members in 18 industries. It covers such indicators as new orders, employment and inventories. About three-quarters of Americans work in service-providing industries such as hotels, retail, education and health care.

Businesses' new orders, which presage any recovery in hiring and production, fell to 38.8 from 40.7 in February.

Employment shrank for the 14th time in 15 months, dropping to 32.3 from 37.3 in February.

The Labor Department on Friday reported that employers eliminated a net total of 663,000 jobs last month as the national unemployment rate jumped to 8.5 percent — the highest level in more than a quarter-century. Retailers eliminated nearly 50,000 jobs, professional and business services axed 133,000, and leisure and hospitality reduced employment by 40,000.

"The labor market continues to be the Achilles Heel of domestic economic activity," said John Ryding, chief economist at RDQ Economics.

Naroff said that even when demand for goods and services recovers, firms will expand their output through overtime and temporary workers before hiring more people.

Analysts had expected the services index to rise slightly following recent modest improvements in home and car sales, and a related measure of the manufacturing sector.

The ISM on Wednesday said its manufacturing index rose to 36.3 in March from 35.8 in February. The reading beat expectations, but that sector has shrunk for 14 straight months.

The services report found that the real estate industry grew in March, while the other 17 industries contracted.

"Respondents remain concerned about the negative economic outlook and rising unemployment," said ISM survey chair Anthony Nieves, and the services industries continued their steady decline since the first quarter of last year.

Even companies known for strong hiring, such as Google Inc., are laying people off. Google last month said it would cut nearly 200 jobs, mostly in advertising sales.

Luxury jeweler Tiffany & Co. recently said it planned to shut down its Iridesse pearl jewelry chain, partly because of the recession, while Costco Wholesale Corp. said Thursday it would shut down its two home furnishing stores.

Survey respondents pinned some hopes on the Obama administration's $787 billion stimulus package, which includes money that will flow to states for public works projects, help them defray budget cuts, extend unemployment benefits and boost food stamp benefits. The administration also is counting on programs to prop up financial companies and reduce home foreclosures to help turn the economy around.

Eight of the industry sectors, including real estate, education, finance and insurance, construction and health care, said they expected to benefit from the spending.

The business activity index rose to 44.1 last month from 40.2 in February — but that just brought it back to January's level. Only four industries reported growth in that category, including real estate and sectors related to travel, such as food and hotels.

Activity in those areas had "fallen off the face of the earth" with the recession, Nieves said.