Service sector keeps rising

November's growth contrasts with fall in manufacturing

December 06, 2006|By James P. Miller | James P. Miller,Chicago Tribune

Two economic reports yesterday highlighted the gap that is opening between the nation's stagnating manufacturing segment and the service sector, which continues to show unexpected zip.

"The service sector is not as weak as expected and is performing vastly better than the manufacturing sector," said Wachovia economist Sam Bullard.

Fueled in part by softening demand from the automotive and housing industries, as well as a downward swing in the often-volatile timing of jet-aircraft sales, orders placed with U.S. factories dropped a hefty 4.7 percent in October, the Commerce Department reported.

The Labor Department, in a move that cheered investors by suggesting that inflationary pressures are weaker than earlier thought, revised an earlier measure of worker productivity upward and lowered its estimate of how much workers' pay has risen.

Taken together, experts said, the news suggests that the U.S. economy is holding up better than some pessimists had been predicting.

The Institute for Supply Management trade group said its index of business activity for the nonmanufacturing portion of the nation's economy climbed to a stronger-than-expected 58.9 reading in November from 57.1 in October. Most observers had expected the index to decline last month to about 55.8.

"Underlying fundamentals remained buoyant for the nonmanufacturing sectors," despite the current troubles in the auto and housing sectors, said Bullard.

For the broad economy, a key question is whether, or to what extent, the troubles of U.S. automakers and homebuilders ripple out to affect consumer spending in other segments.

Experts suggested that consumers, though they have become wary about making big-ticket purchases because of higher borrowing rates, still appear ready to spend on entertainment and meals out, clothing, travel, education and professional services. They have more to spend, too, thanks to the recent decline in energy prices.

Based on yesterday's surprising update of nonmanufacturing data, "reports of the economy's demise may have been premature," said Joel L. Naroff, president of Naroff Economic Advisors. "It still doesn't look as if the problems in housing and motor vehicles have spread into the general economy."

Under the format used by the Institute for Supply Management, a reading above 50 suggests the sector is in expanding; a number below 50 indicates it is contracting. November marked the 44th consecutive month of expansion for the service-sector index.

The institute also issues a closely followed monthly report on the manufacturing sector. On Friday, the group said manufacturing in November slipped below 50 for the first time since April 2003, dropping to 49.5 from 51.2 in October.

Yesterday's Commerce Department report on factory orders highlighted the same stagnation. The 4.7 percent drop, which was in line with expectations, showed the biggest decline in more than six years.

The report contained few major surprises. Orders for durable goods, or big-ticket items expected to last three years or more, showed a sharp 8.2 percent decline in October. There was a large 46 percent drop in orders for nondefense aircraft, reflecting the fact that Boeing Co. recorded 52 jetliner orders in October, compared with 175 in September.

Because the unpredictable timing of passenger-jet orders and automobile purchases tends to skew the data, many economists prefer to look at what is known as "ex-transport" results, which exclude those volatile sales. Ex-transport sales were down 0.8 percent in October, after a 3.1 percent drop in September and a 0.9 percent decline in August.

A sharp drop in demands for construction machinery put downward pressure on the latest factory-order data, and so did a significant drop in sales of computers.

Still, Moody's Economy.com economist Zoltan Pozsar noted that "with the exception of computers, weakness in new orders and shipments remains primarily confined to those segments with direct ties to autos and housing," such as wood products and furniture.

The durable-goods portion of the factory-order data was largely in line with an advance report the Commerce Department issued last week.

The Labor Department said worker productivity inched up 0.2 percent in the third quarter, a modest improvement over the "no change" that a preliminary report issued last month had indicated. In addition, it said, wages and benefits measured against output rose at an annualized rate of 2.3 percent, much lower than the 3.8 percent increase reported last month.

Investors interpreted those results as indicating those key inflationary pressures are lower than previously thought and that the Federal Reserve is more likely to begin cutting interest rates next year as a result.

The revisions "should provide comfort to [Fed Chief Ben S.] Bernanke," said Merrill Lynch economist David Rosenberg.

James P. Miller writes for the Chicago Tribune.

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