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Service sector expands at fastest pace since 2006

The Institute for Supply Management says its index of activity in the service sector rose to 57.1 in December, up from 55 in November and the highest level since May 2006.

January 06, 2011|By Tom Petruno, Los Angeles Times

The U.S. economy's service sector grew in December at the fastest pace in more than four years, a survey indicates, providing another sign that the recovery is picking up speed.

But an index measuring job gains in the sector was disappointing, suggesting that many businesses remain slow to hire despite better sales. Sound familiar?

The data further muddled the job-market picture before the government's official report on December employment, due Friday.

The Institute for Supply Management said Wednesday that its overall index of activity in the service sector rose to 57.1 in December, up from 55 in November and the highest level since May 2006.

Any reading over 50 indicates growth in the sector. The index has been consistently above 50 for the last 12 months.

Fourteen of 17 industries reported growth for the month, including real estate, retail, transportation, entertainment and healthcare. The three service industries reporting contraction in December: agriculture, educational services and public administration (i.e., federal, state and local government).

In another encouraging sign, an index measuring the pace of new orders in the service sector surged to 63 last month, its highest level since August 2005 and up from 57.7 in November.

The institute said those responding to its survey of companies in December were "overall mostly positive about business conditions."

But where's the hiring to go along with that positive attitude? The institute's index of service-sector employment slid to 50.5 last month from 52.7 in November. That means employment grew in December, but the pace slowed.

"The drop in the employment index … suggests that the general upturn in economic activity may not yet be generating new labor demand," said David Resler, an economist at Nomura Securities.

Another report Wednesday, however, said just the opposite: ADP Employer Services, in its monthly report on private-payroll trends, said companies added a stunning net 297,000 jobs in December — most of them in services. But not everyone believed it.

The decline in the service employment index "suggests that the strong ADP employment number has considerable statistical distortion and should therefore be interpreted with care," economists at Goldman, Sachs & Co. said in a note to clients.

Still, financial markets interpreted the day's numbers as bullish for economic growth: Stocks rallied, sending the Dow Jones industrials and the Standard & Poor's 500 index to fresh two-year highs. Treasury bond yields and the dollar also rose.

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