Services Sector Stalled in Jan.

NEW YORK – A key index measuring the vast U.S. services sector of the economy retreated slightly in January, a report released Tuesday showed, casting some doubts on hopes the struggling economy will swiftly rebound from recession.

The Institute for Supply Management, an industry trade group, said its monthly non-manufacturing index edged lower to 49.6 in January from a revised 50.1 in December. That followed two straight months of rises and bucked economists' forecasts of a rise to 52.0.

A reading below 50 indicates contraction in the services sector, which includes everything from transportation to legal and financial services. ISM's more closely watched manufacturing index has been mired below 50 for the past 1-1/2 years but rallied to 49.9 in January, spurring recovery hopes.

"It is important that the index was below 50, showing that the service sector, the most important part of the economy, might still be contracting," said Tony Crescenzi, market strategist at Miller, Tabak & Co. in New York.

ISM's new orders index, a gauge of business activity in the months ahead, also fell, to 49.4 in January from a revised 51.5 in December.

Ralph Kauffman, chair of ISM's non-manufacturing survey committee, said in a statement that the dip in the January index showed "a continued struggle for growth in non-manufacturing economic activity."

The index, which has hovered near 50 for the past three months, could indicate the services sector was in the process of bottoming, but Kauffman said it was too early to tell.

"I'm optimistic that it is, but I can't say for sure," Kauffman said in a teleconference with reporters.

Stocks briefly extended their losses after the report was released, but investors subsequently focused instead on a government report showing an improvement in factory orders -- particularly in the beaten-down technology sector.

Treasury securities also rose briefly after the services data but reversed course by mid-morning as stocks rose on the factory report.

A slower pace of decrease in employment over the past three months, along with growth in exports and imports, "provide some reasons for optimism that the economy will ultimately move in a positive rather than negative direction as we proceed farther into 2002," the ISM services report said.

The group's non-manufacturing prices index surged to 49.0 in January from 38.5 in December. But report said the data still indicated "low inflationary pressure" on services industries.

ISM, formerly the National Association of Purchasing Management (NAPM), compiles its diffusion index by surveying about 370 purchasing executives in more than 60 different service industries monthly. The index was first launched in 1997. The group's manufacturing index dates back to the 1940s.