WASHINGTON (AFP) — Data showing a meltdown in the crucial US service sector -- the second shock surprise in a week for the world's biggest economy -- bolstered the idea that a recession is at hand, analysts said Tuesday.
The Institute of Supply Management's index on nonmanufacturing activity surprise slump to 41.9 percent in January from 54.4 percent in December heightened concerns that the economy is weaker than anticipated and increased the odds of more interest rate cuts.
The report on services, which makes up the lion's share of US economic activity, is another sign of a sharp slowdown in the US economy that some analysts say has already turned into a recession.
"Indeed, not only is the economy in a downturn, the abruptness and depth of the decline seen in this report, not to mention the collapse in auto sales in January and unprecedented tightening in credit conditions ... adds to our concern that we are facing a much deeper downturn than we saw in 2001," Merrill Lynch economist David Rosenberg wrote in a note to clients.
Following this report and last week's dismal report on employment, Rosenberg said there was a "strong chance" the Fed may cut rates further even before its next meeting March 18.
The report was the second piece of bleak economic news in the past week. On Friday, the government reported the US economy lost 17,000 jobs in January in the first decline since 2003.
The ISM reading was the lowest since October 2001, when the US economy was in recession, and the first time in 58 months the index was below the level of 50 percent which indicates expansion, the ISM said.
The report was also well below analyst expectations of 53 percent.
Sal Guatieri at BMO Capital Markets said the survey, which measures almost nine-tenths of economic activity, "provides compelling evidence -- along with the decline in payrolls and a six percent slide in auto sales in January -- that the US economy is in recession."
The prices index of 70.7 percent meanwhile showed strong inflation pressures.
ISM survey chief Anthony Nieves said corporate supply chiefs "also indicated that they are experiencing inflationary pressures. The overall indication in January is that nonmanufacturing has come to the end of a long-term period of growth and has contracted for the month of January."
Last week, the ISM's manufacturing survey released showed sluggish growth with an index of 50.7 percent.
Many economists say a recession, usually defined as two consecutive quarters of shrinking economic activity, is likely in 2008 as a result of a meltdown in the US housing market that has hit banks and finance companies hard.
The US economy expanded in the fourth quarter but barely -- at an annualized pace of 0.6 percent -- according to the government's estimate last week of gross domestic product (GDP).
The Federal Reserve has slashed interest rates sharply since September to bring the federal funds rate to 3.0 percent from 5.25 percent in an effort to stimulate flagging activity. Congress is also debating an economic stimulus plan.
Stephen Gallagher, economist at Societe Generale in New York, said the latest ISM services survey was "in recession territory."
"The plunge in the nonmanufacturing sector to such lows looks as though real GDP is turning negative after very sluggish growth at the end of 2007," Gallagher said.
Offering a different view, Brian Wesbury at First Trust Portfolios said he believed the ISM report "was exaggerated to the downside."
"Other data do not corroborate this weakness -- even the ISM manufacturing index rose in January," he added.
"The steepness and suddenness of the decline in January -- even exceeding the aftermath of 9/11 -- suggests the figure can sometimes be driven by moods and sentiment rather than underlying economic output."
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