Today, economists expect a report to show the U.S. services sector — from retailing to health care to construction — contracted in February for the second straight month. If so, it would be the first time that’s happened since the 2001 recession. Such a reading would boost the likelihood that a new recession is already under way, says Wells Fargo economist Scott Anderson.
The Institute for Supply Management (ISM) has tracked services only since 1997. But the sector makes up about 85 percent of the economy, according to Thomson Financial Economist Jeoff Hall, and market reaction to January’s surprisingly low figure showed how much weight the measure carries: The S&P 500 suffered its steepest one-day drop, 3.2 percent, in about a year.
Economists expected the January report to show expansion. When it registered 41.9 for business activity and 44.6 for nonmanufacturing overall — with a reading below 50 indicating contraction — JPMorgan strategist Thomas Lee says it left him “alarmed and confused.”
ISM has tracked the business-activity figure since the report’s inception and the overall figure, a composite of business activity, employment and other data, beginning with the January report.
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Several economists questioned the results, with JPMorgan’s Lee skeptical of the report’s “soundness.” Strategist Ed Yardeni also points to “some puzzling ambiguities.”
Many of the questions revolve around the report’s data-weighting system; Lee says the report magnifies smaller businesses to give them greater impact, for example. An ISM spokeswoman defended the group’s figures and said she hasn’t heard any complaints about methodology.
Wall Street projects further contraction for February. Economists expect a reading of 47.5, according to Thomson Financial/IFR. Thomson Financial’s Hall, though, says it isn’t clear if this figure is for the business-activity index or overall; it’s likely a blend. Hall expects weakness in construction to pull down the index, though he warns readings across the economy have been volatile recently.