Service Sector Posts Biggest Gain In Six Years

New York, NY, Aug. 6--Economic activity involving the service sector in July scored its biggest monthly gain in six years amid record growth of new orders, according to a report released Tuesday. The Institute for Supply Management said its non-manufacturing index moved to 65.1 from 60.6 in June and 54.5 in May. Readings above 50 indicate growth in activity, while those below 50 point to contraction. The strength of the report served as confirmation for economists that the economy is finally embarking on a path of sustained economic growth. The July reading, which marked the fourth straight month of growth and the best reading since July 1997, was considerably better than the 59.0 reading predicted by economists. The ISM said the service-sector report, which covers the more than two-thirds of the U.S. economy not involved in producing goods, was aided by broad-based growth in new orders, order backlogs and imports, although employment posted only modest gains. The group noted that the purchasing and supply executives surveyed are generally more optimistic than earlier in the year. The gains in the ISM non-manufacturing report "look very good," said Michael Moran, economist with Daiwa Securities in New York. While he noted that the report was known for its volatility, the July increase, coupled with increases over recent months, "has been enough to provide distinct evidence things are picking up." But the gains weren't enough to offset disappointing news for investors, including lowered outlooks from Gillette and Costco and a car bombing in Indonesia that killed 13 people. In midafternoon trading, the Dow Jones industrial average was down 61.55, or 0.7 percent, at 9,124.49, and the Nasdaq was down 20.76, or 1.2 percent, to 1,693.30. Service-sector activity has for some time been the bulwark of growth in the United States, and has proved more resilient to the forces that have caused trouble in the rest of the economy over the past several years. The ISM report comes amid broad signs that the U.S. economy is finally showing some vigor. Last week, the ISM reported that its manufacturing index moved toward growth for the first time in five months. However, employment growth, a key barometer of economic health, has been lagging. The government said last week payrolls contracted in July on yet another drop in factory-employment levels, even as the unemployment rate moved down to 6.2 percent from 6.4 percent. The ISM said that its service-sector employment index showed small improvements, with a reading of 50.7, versus 50.3 in June and 48.7 in May. "Employment is being dragged up kicking and screaming by other activities--particularly new orders," said Ralph Kauffman, chair of the non-manufacturing survey committee. This was the first time the employment reading was over 50 for two months in a row since January and February 2001, just before the recession started in March. "I don't want to be too optimistic," Kauffman said, "but it looks like employment is trying to gain some traction." Dana Johnson, an economist with Banc One Capital Markets in Chicago, said the strength of the report suggests the second half of the year is starting out with better growth levels than previously thought. "The clear implication is that GDP growth will be considerably stronger in the third quarter than in the second," Johnson said.