Services Index Plummets, Points to Recession

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

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

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

A reading below 50 indicates contraction, and bond prices jumped asthe figures reinforced investors’ conviction that the U.S. economy isalready in recession. Stocks sold off.

The employment index fell to 43.9 from 51.8, corroborating lastweek’s dire U.S. payrolls report, which showed the first net monthlycontraction 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 justifiedthe Federal Reserve’s recent steep interest rate cuts. The Fed slashedrates by 1.25 percentage points in the past two weeks, a rare strongdose of stimulus over such a short period.

A downturn that began in the U.S. housing sector about two years agohas spread to banks, which made many loans to sketchy borrowers and arenow 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 latestweek, with Redbook Research reporting a 0.4 percent decline, but theInternational Council of Shopping Centers registering a 1.7 percentrebound.

(Editing by James Dalgleish)

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