Last night’s bad news, a private report showing that the huge US service sector has suffered a surprise fall, could very well be the bell that signals the start of the US recession: certainly it stunned markets and economists.
The report from the Institute of Supply Management (ISM), which revealed that activity in the service sector declined for the first time in nearly five years, was leaked and had to be rushed out before the start of trade in New York. The market promptly tanked.
Wall Street had its worst day in three months — the Dow Jones plunged 370 points or 2.9% in value — and European markets fell sharply.
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Gold, copper and oil led most commodities sharply lower in the US. Gold fell more than $US17 an ounce to $US892.10. Only wheat and soybean oil had big rises: both near record levels and a good sign that the inflationary pressures from rising food prices are still with us.
From retailing to real estate, car dealers to healthcare, the US is a service-based economy (like Australia), so the ISM survey results have a lot more credibility with the market than some official reports from the Government.
The ISM’s non-manufacturing index, which reflects almost 90 percent of the economy, fell from 54.4 to 41.9, its lowest level since October 2001. A reading of 50 is the dividing line between growth and contraction and according to Bloomberg, the index was only forecast to fall to 53.
In comments to Bloomberg and CNNMoney, economists said that the ISM reading, coupled with last Friday’s government report showing the first monthly net loss in jobs in more than four years, is proof that recession is now a reality.
“This is a stunning fall,” said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. “If accurate, it’s dire news on the economy.”
“This is the most unequivocal sign we’ve had that the economy is weakening,” said Stephen Stanley, chief economist at RBS Greenwich Capital. “There is nothing in this report that was redeeming,” he added. “It’s simply terrible.”
“My forecast had been that the recession would begin this quarter, but the hard data wasn’t there yet,” said Keith Hembre, chief economist of First American Funds. “But now we’re seeing that. The service sector is a much larger component of the economy [than manufacturing] and this is very much a recession reading.”
Many of the economists quoted said the latest report was a sign that problems are no longer restricted to just housing and manufacturing.
Economist Bob Brusca of FAO Economics said he doubted that the US was in recession a week ago, but now he believes there’s about a 75% chance that a recession began in January. “That’s what recessions do. They come upon you all of a sudden,” he said.
“When you look back at history, you’re struck by how even-keel it is until the bottom just falls out.”