U.S. Services Index Bounces Back

NEW YORK – Growth returned unexpectedly to the U.S. services sector in November, according to a report on Wednesday that unleashed new optimism that the world's largest economy may soon claw its way out of a recession.

The National Association of Purchasing Management (NAPM) said its non-manufacturing index, a gauge of the vast services sector, surged to 51.3 in November from a four-year low of 40.6 in the prior month. That far outpaced economists' forecasts for 42.7.

A reading above 50 indicates growth in the services sector, which includes everything from transportation to legal and financial services.

"It certainly is a turning point," said James O'Sullivan, senior economist at UBS Warburg in Stamford, Connecticut. "Weakness is fading relative to the period right after Sept. 11.

"We've seen that in a variety of reports now. The question is whether this is the first step toward outright positive growth," O'Sullivan said.

Several reports this week have raised hopes for a recovery. The pace of decline in manufacturing activity slowed in November, while consumer spending jumped by a record amount in October, triggered by zero-interest auto financing.

And another report on Wednesday showed demand for loans to purchase homes hit an all-time high in the past week.

NAPM's more closely watched manufacturing index, which measures less than one-fifth of overall economic activity, has been mired below 50 for the past 16 months.

Stocks, which had rallied and crossed milestones earlier in the session, extended their gains after the data were released. The dollar rose, while U.S. Treasury bonds sold off heavily as investors scaled back expectations for further Federal Reserve interest rate cuts.

"We are at least at the bottom of the decline in activity, although there is some indication we have started coming back up to growth," Ralph Kauffman, director of the NAPM non-manufacturing survey, said.

The new orders index, a gauge of future business activity, spiked to 48.3 in November from 40.4 in October, but still indicated contraction. The non-manufacturing imports index also rose to 52.4 from 49.8 in the prior month.

Meanwhile, prices paid by services firms tumbled in November for a fifth straight month, dragging down the non-manufacturing prices index to 38.5 from 41.5 in October. That was the lowest reading in the four-year history of the index.

While the data spurred optimism on financial markets, many economists cautioned the index has given false starts in the past and was not a conclusive predictor of an economic recovery.

"Just as retail sales, home sales, factory orders, and a number of indicators bounced after plunging in September, the non-manufacturing NAPM exhibited a slight recovery after October's historical low," said Stephen Stanley, economist at Greenwich Capital Markets.

"Whether that bounce is sustained is the key question of the day across the economy."

NAPM, an industry trade group, compiles its diffusion index by surveying about 370 purchasing executives in more than 60 different service industries monthly.

Some market participants were puzzled on Wednesday by the divergence between the headline number, above 50, and the new orders index and other subcomponents, which remained below 50.

In NAPM's manufacturing survey, the headline purchasing managers index (PMI) is calculated through a weighted average of five subcomponents, including new orders, all of which are seasonally adjusted.

But the non-manufacturing main index is calculated through a response to a question asking members if conditions are better, the same, or worse than the previous month, Kauffman told Reuters. It is not a composite index of its components.

The index was first launched in 1997 and NAPM began seasonally adjusting the business activity, new orders, imports, and employment indexes in January of this year. The NAPM manufacturing index dates back to the 1940s.