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Friday, April 04, 2003

US Services Take a Hit

Now it's the US services sector, which accounts for around 70% of the whole economy, which looks like it just had a nasty knock.

The vast U.S. service sector unexpectedly shrank in March for the first time since January last year, a report said on Thursday, in the latest sign the economy was already faltering as the war in Iraq was launched. The pull-back in services, coupled with data this week showing contraction in manufacturing, a hefty drop in factory orders and a big jump in jobless claims, have revealed a grim picture of the economy's health as U.S.- led forces approach Baghdad. The Institute for Supply Management said its index of non-manufacturing activity fell to 47.9 - the lowest reading since October 2001, just after the Sept. 11 attacks on the U.S. - from 53.9 in February.

Economists took a cautious view of the data and said the Federal Reserve would likely wait to see how long the war drags on before taking any action on official interest rates, despite the array of weak economic figures.So far the Fed has expressed optimism growth will take off once the war uncertainty fades."I think the Fed will withhold judgment because it's impossible to ascertain to what extent the uncertainty right before the war was leading to paralysis," said Jade Zelnik, chief economist at RBS Greenwich Capital."But if they become convinced the war will be drawn out, they will not be able to ignore such weak statistics forever," she said. Financial markets again overlooked the weak data and focused on developments in Iraq. Stocks and bonds were mostly flat on the session. Survey respondents said the war was having a negative impact on their businesses. But beyond the war, some said low interest rates were still not helping to spur capital investment, one of the key missing ingredients preventing a full-fledged recovery. The ISM services reading was much worse than the 52.3 reading forecast by economists. Any figure below 50 signals contraction in the sector which includes everything from entertainment to tourism and banking. The survey's components also showed deterioration across the board. New orders, a key source of future growth, fell to 47.7 from 53.0 in February. Businesses stepped up layoffs, with the employment index falling to 47.9 from 49.0 last month. A surge in energy prices tied to the Iraq conflict and oil supply disruptions around the world has also eroded both consumer and business sentiment.The prices paid index, rising to 62.0 from 60.9 the prior month, showed high energy costs are still sapping profit margins, meaning business managers will remain reluctant to make investments or hire workers. Earlier this week ISM's gauge of manufacturing activity revealed a sharp slowdown, with growth in the sector contracting in March for the first time in five months.
Source: Reuters

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