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US services sector suffers record slide in Jan

ISM index slid to 41.9 in Jan from 54.4 in Dec, stoking recession fears

(NEW YORK) The US services sector retrenched sharply in January to levels not seen since the 2001 recession, renewing fears about an economic slump, according to a survey released on yesterday.

The Institute for Supply Management’s index of non-manufacturing plummeted to 41.9 from 54.4 in December, its largest monthly decline on record and a far greater drop than Wall Street expected.

US stocks tumbled yesterday, led by a sell-off among shares of financial companies, on the ISM report. The S&P 500 index at one point fell more than 2 per cent. The Dow Jones Industrial Average was down more than 200 points in early trade. The Standard & Poor’s 500 Index was down 22.15 points, or 1.6 per cent, at 1,358.67. The Nasdaq Composite Index was down 33.63 points, or 1.41 per cent, at 2,349.22.

The ISM number ‘does bring in a heightened concern about the economy, and it adds further pressures to stock prices’, said Steve Goldman, market strategist at Weeden & Co.

A Reuters poll of economists had produced a median expectation of a slip to 53.0. ‘The recession has indeed arrived,’ said Jane Caron, chief economic strategist at Dwight Asset Management in Burlington, Vermont.

A reading below 50 indicates contraction, and bond prices jumped as the figures reinforced investors’ conviction that the US economy is already in recession.

The employment index fell to 43.9 from 51.8, corroborating last week’s dire US payrolls report, which showed the first net monthly contraction in the labour market in more than four years.

Weakness was evident across the board. A measure of new orders fell to 43.5 from 53.9. ‘It’s another recession marker on the radar screen,’ said Cary Leahy, economist at Decision Economics in New York.

Analysts said the gloom surrounding the services report justified the Federal Reserve’s recent steep interest rate cuts. The Fed slashed rates by 1.25 percentage points in the past two weeks, a rare strong dose of stimulus over such a short period.

A downturn that began in the US housing sector about two years ago has spread to banks, which made many loans to sketchy borrowers and are now grappling with rising mortgage defaults.

 

Source: Reuters (Business Times 6 Feb 08)

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