ISM: Service Sector Continued Slow Recovery in February

In another positive sign for the U.S. economy, the service sector continued its slow recovery in February, according to the Institute for Supply Management. Its Non-Manufacturing Index crept up to 59.7 from 59.4, expanding for the 15th straight month. That increase might not sound like much, but some of its components indicate that the sector is headed in the right direction.

First, here's the chart from ISM:

ism services 2011-02 v2.png

Most of the numbers above are good news. At 66.9, business activity rose to hits highest level since January 2004. And that month was a blip at 67.7. ISM's service sector business activity score hasn't otherwise as been as high as it was in February since at least July 1997, when the firm's provided data began.

You can also see that employment has improved. This component's score in February was the best since April 2006. Although it only indicates that 20% of firms polled indicated higher employment, just 12% said employment was lower.

The status of orders appears a little complicated. New orders continue to expand, but at a slightly slower pace than was indicated in January. But the backlog of orders is growing faster, as are new export orders.

Meanwhile, firms began ramping up inventories again in February. That's probably what drove supplier deliveries to improve a little: they continued to slow in February, but not as quickly as they did in January. And while, on average, these firms still think inventories are too high, this sentiment of too-high inventories weakened last month.

What does it all mean? Put together, the data suggests that firms are sensing additional demand as business activity rises. That, in turn, is leading inventory growth. Furthermore, firms are slowly expanding hiring.

At this point, one clear obstacle stands in the way of this trend continuing -- prices. As the chart above shows, they continued to rise om February. This probably isn't shocking, as oil and commodities price increases got a lot of attention last month. If prices continue rising, that could put pressure on business activity and hiring.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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