Services Index Plummets, Points to Recession

By Reuters -  |  Posted 2008-02-05

NEW YORK (Reuters) - The U.S. services sector retrenched sharply in January to levels not seen since the 2001 recession, renewing fears about an economic slump, according to a survey released on Tuesday.

The Institute for Supply Management's index of non-manufacturing plummeted to 41.9 from 54.4 in December, its largest monthly decline on record and a far greater drop than Wall Street expected. A Reuters poll of economists had produced a median expectation of a slip to 53.0

"The recession has indeed arrived," said Jane Caron, chief economic strategist at Dwight Asset Management in Burlington, Vermont.

A reading below 50 indicates contraction, and bond prices jumped as the figures reinforced investors' conviction that the U.S. economy is already in recession. Stocks sold off.

The employment index fell to 43.9 from 51.8, corroborating last week's dire U.S. payrolls report, which showed the first net monthly contraction in the labor market in more than four years.

Weakness was evident across the board. A measure of new orders fell to 43.5 from 53.9.

"It's another recession marker on the radar screen," said Cary Leahy, economist at Decision Economics in New York.

Analysts said the gloom surrounding the services report justified the Federal Reserve's recent steep interest rate cuts. The Fed slashed rates by 1.25 percentage points in the past two weeks, a rare strong dose of stimulus over such a short period.

A downturn that began in the U.S. housing sector about two years ago has spread to banks, which made many loans to sketchy borrowers and are now grappling with rising mortgage defaults.

Lately, it is the consumer that appears to be throwing in the towel. Still, weekly chain store sales did paint a mixed picture in the latest week, with Redbook Research reporting a 0.4 percent decline, but the International Council of Shopping Centers registering a 1.7 percent rebound.

(Editing by James Dalgleish)

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