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What is scary about latest economic data?

The Institute of Supply Management (ISM) issues a monthly index of activity in the non-manufacturing or services sector in the United States by surveying purchasing managers around the country.

The ISM is a US-based industry association.

The ISM survey on the services sector is a closely-followed gauge of a wide swathe of the US economy – from hotels and restaurants to banks and insurance companies, telecommunications firms and retailers.

The index for January, released on Tuesday, showed that a sharp contraction is under way in businesses that represent almost 90 per cent of the US economy.

The drop in the index was sharp and shocking. It plunged to 41.9 last month from 54.4 in December.

‘This is an absolute collapse of the index,’ Mr Nigel Gault, the chief US economist at Global Insight, told the Associated Press.

Economists had been expecting a modest fall to 53. A number above 50 shows an expansion, while a number below 50 indicates a contraction.

The figures show that the US economy’s one silver lining is now in trouble.

The massive services sector had been propping up the US economy when its other legs – the housing and manufacturing sectors – have already weakened.

The ISM figure is also the lowest since October 2001, when the US economy was in a recession, and was the first time in five years that the services sector shrank.

  • Particularly worrisome, economists said, is that the elements of the survey that forecast future activity – new orders and jobs – are among those that dropped the most, signalling more trouble ahead.

    New orders fell to 43.5, while employment fell to 43.9.

  • The ISM report was also the US economy’s second shock surprise in a week. Last Friday, the US government reported that the country lost 17,000 jobs, the first fall in employment since August 2003.

Source: The Straits Times 6 Feb 08

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