Service Sector Submits

A plunge in the ISM index is a worrisome sign for the economic expansion.

By SHARE

A huge drop in the Institute for Supply Management's nonmanufacturing activity index marks a large stumble for a key part of the U.S. economy. The index, which fell to 41.9 in January from 54.4 in December and far below Wall Street's forecast of 53, posted its worst reading since it began in October 2001. A reading below 50 indicates a contraction. In the report, the ISM's newly launched nonmanufacturing business index fell to 44.6. That index includes a composite of business activity, new orders, employment, and supplier activity, all of which looked abysmal.

Formerly one of the economy's healthier sectors, services are now feeling the pull of a slowing economy, falling home prices, and concerns over a weakening job market, economists say. If the index's decline, which many economist called a "collapse," continues, the trend would be yet another signal that a recession in the coming few quarters may become a reality. Global Insight economist Brian Bethune puts it this way: "The strong negative signal from the services sector in January suggests that economic activity is very likely to shrink in the first half of 2008."

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  • Kirk Shinkle

    Kirk Shinkle is a senior editor for U.S. News Money and manages the Best Funds portal. Follow him on Twitter @KirkS or email him at kshinkle@usnews.com.