Business

Service Sector Growth Slowed Significantly in April

By Daniel Indiviglio

This isn't a good sign. In one of the early economic temperature readings for April, the Institute for Supply Management reports that service sector growth slowed considerably. Its Non-Manufacturing Index fell drastically to its August 2010 level, which matches the 12-month low. Is the recovery losing its battle with rising gas prices and economic other shocks?

Here's the chart from ISM showing the components of its service sector barometer:

ism services 2011-04.png

First, the NMI dropped a painful 4.5%. As mentioned, 52.8 matches its August level, but that was a low point for the early recovery. You have to go back to January 2010 to find a lower value than that for the NMI. Any score above 50 indicates growth, but at 52.8 that growth is much slower than it was when it peaked at 59.7 in February.

Business activity has now fallen two months in a row as well. That index has fallen a dramatic 13.2% since February. Again, however, business activity is still growing, on balance, but barely.

If you think the performance of those two indices sounds bad, then you'll be really worried about new orders. Their index fell a painful 11.4% in April to 52.7. This indicates anemic growth in new orders. New export orders also fell significantly last month, by 5.5%.

This report doesn't provide a pleasant verdict on hiring. If business activity and orders aren't growing as quickly, neither will hiring. Higher demand has been driving firms to take on more workers, but as that declines so will new job openings. In fact, we saw this through the ISM report, as employment growth also slowed in April. At 51.9, jobs are nearly declining again.

The service sector's status portrayed by this report isn't good. Its growth continued in April but at a very slow pace. Business activity and new order growth declined to a point where contraction in May looks plausible, which would end a 17-month trend of growth. Of course, this would also provide a potentially disastrous narrative on the recovery. Economists are currently forecasting that the recovery will continue to be slow. For the service sector, at least, it appears to be slowing even further. If the trends in this report continue, then the recovery may soon pause or even reverse.