Surprise: service sector expands in April; economy 'could muddle along'

The improving service sector report by the Institute of Supply Management may be an aberration, since it deviated from data showing continued weakness in employment, automobile sales and chain-store sales, some analysts caution.

By ELLEN SIMON
The Associated Press

5/5/2008

NEW YORK — Data showing an unexpected expansion in the service sector in April raised hopes that the U.S. economy will be spared a sharp downturn even though many observers feel it is already in a mild recession.

Some analysts saw the report, coupled with Friday’s better-than-expected job-loss numbers, as a sign the economy could muddle along, neither growing or declining dramatically.

“I don’t see anything that indicates that activity is strong, I don’t see anything that indicates it’s very weak. We’re teetering on the zero line,” said Dan Meckstroth, chief economist of the Manufacturers Alliance, a trade group.

Others cautioned that Monday’s service sector report by the Institute of Supply Management may be an aberration, since it deviated from data showing continued weakness in employment, automobile sales and chain-store sales.

The trade group’s index of the service sector showed a better-than-expected reading of 52 for April, up from 49.6 in March. Wall Street economists surveyed by Thomson Financial/IFR had expected a reading of 49.3.

The index had been below 50 for the previous three months. A reading above 50 indicates the sector is growing, while a reading below 50 indicates contraction.

Citigroup Inc. economist Steven Wieting said he took the reading with a grain of salt, saying the services report the group puts out “has a much more limited history” than its long-running and important manufacturing index.

“Some of the industries that showed up in the ‘improving’ column were construction and real estate,” Wieting said. “I’m sure we’re going to see that someday. I’d just like confirmation.”

Still, the data matched his expectations that the recession would be shallow.

Twelve industries reported growth, including real estate, agriculture, wholesale trade, public administration and education. The six that reported contraction included transportation, hotels and health care.

The services sector accounts for almost 80 percent of the nation’s economy. The services index fell steeply in January to 44.6, its first drop below 50 since March 2003, and was below 50 in February and March.

The Institute for Supply Management’s recent reading of the manufacturing sector contracted in April, stalled near its lowest level in five years.

At Berkshire Hathaway Inc.’s annual meeting Sunday, the company’s billionaire chairman Warren Buffett reiterated that the current economy meets his definition of a recession: When most people and businesses are not doing as well as they were three, six or nine months ago.

“I would say that we’re in a recession clearly,” Buffett said.