Service Industries Continue to Expand

MBA (6/5/2008 ) Velz, Orawin
The nation’s activity in the service industries expanded, although at a slower pace, in May, according to the Institute for Supply Management (ISM) nonmanufacturing survey.
The ISM nonmanufacturing index fell to 51.7 in March from 52.0 in April. This was the second consecutive month that the index showed a reading above 50, indicating an expanding service sector. The service sector includes the retail, transportation, health care, finance, real estate and construction industries.

The index of new orders rose to 53.6—the highest this year—from 50.1 in April. This was the third consecutive increase. The employment index dropped to 48.7 from 50.8, suggesting weak employment in the service industries in May. The ISM employment index has shown contraction in four of the past five months.

One area of concern was that an index gauging prices paid by service providers jumped nearly five points to 77.0, the highest since September 2005.

Overall, the report pointed to rising costs and sluggish growth in the service industries. The ISM nonmanufacturing index slipped below 50 in each month of the first quarter but has improved since then.

A separate report showed that productivity rose sharply in the first quarter despite weak economy growth, suggesting that firms shed workers and cut back on hours in response to weaker demand. Nonfarm productivity, a measure of output per hour, increased 2.6 percent (annualized rate) in the first quarter, upwardly revised from an initial report of 2.2 percent. The revision was due to an upward revision to output growth. From a year ago, productivity increased 3.3 percent, the strongest year-over-year growth in nearly four years.

Unit labor costs—a gauge of inflationary pressures from compensation—rose an unrevised 2.2 percent. However, unit labor costs growth in the fourth quarter of 2007 was revised sharply higher to 4.7 percent from 2.8 percent. Over the past year, unit labor costs have increased 0.7 percent in the first quarter, an upward revision from 0.2 percent in the preliminary report. Despite the upward revision, the year-over-year growth was still the slowest pace since the second quarter of 2004. Overall, the report indicated that productivity growth has remained strong with wage pressures remaining under control.

Stock markets advanced for the first time in three days while Treasuries declined on the stranger-than-expected ISM report. Stocks fell later on after Moody's Investors Service said it may lower the Aaa insurance ratings for MBIA Inc. and Ambac Financial Group Inc., the world's largest bond guarantors. The 10-year Treasury notes rose slightly and stood around 4.93 percent by mid-Wednesday afternoon.