Thursday, November 8, 2007

Growth in the Service Sector is Up in October

This post is included because of the importance of the service consumption to the GDP numbers (i.e. economic growth). The largest component of GDP is the personal consumption expenditure (PCE). The PCE is made up of three components the consumption of durable goods, non-durable goods, and services. For Q3 the PCE was up slightly from the previous quarters all on the strength of the service sector. Both durable and non-durable goods consumption was down from the same period last year. Text in bold is my emphasis. From

Strength in new orders helped propel the U.S. services sector to a faster-than-expected growth rate in October, but economists warned the data didn't foretell that economic growth would pick up soon.

The Institute for Supply Management said Monday that its index gauging the health of non-manufacturing industries registered 55.8, up from 54.8 in September. A reading above 50 indicates expansion, while one below 50 shows contraction.

The services sector, such as airlines, hair salons, accountants, doctors, dentists and plumbers, has been helping to prop up the economy even as manufacturing has slowed. "Non-manufacturing business activity increased for the 55th consecutive month in October," said Anthony Nieves, chairman of ISM.

The report's components showed growth in orders and slower expansion rates in employment and prices. Nine non-manufacturing industries, including mining, retail trade, construction, real estate, rental and leasing, professional, scientific and technical services, reported increased activity in October.

Bernard Baumohl, managing director of the Economic Outlook Group, said the strength of the survey was a surprise but cautioned that the state of the services sector is not always the best harbinger of an economic turning point.

"To determine a turning point in the economy you have to look at the goods producing sector," he said.

"People tend to still go to the dentist and the doctor even when things turn down," he said. "But you can put off a purchase of goods."

According to Baumohl, if consumer spending slows in coming quarters, it will eventually apply the brakes on the services sector, which he estimates at 85 percent of the U.S. economy.

Another economist said the survey lags at least one month behind retail shopping tallies in giving a reading on the economy. "It tells us nothing at all about the strength of activity today, still less the future," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

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