Non-Manufacturing Data Not a Non-Factor

While manufacturing has staged an impressive rebound, the recovery in the nation's vast service sector has been more subdued. It also could prove more telling.


The Institute for Supply Management will release its index of February nonmanufacturing activity on Wednesday morning, and economists polled by Dow Jones expect it to rise slightly to 51 from 50.5 in January.

Such a gain would be encouraging, but it's a far cry from the improvement seen in manufacturing activity thus far. Since bottoming out in December 2008, ISM's manufacturing index reached a six-year high of 58.4 in January, a bullish sign despite its softening to 56.5 last month.

The factory sector's recent improvement has been bolstered by global demand for U.S. exports, inventory restocking and growth in business spending on equipment and software.

Factory activity may be on the mend, but it is a relatively small part of the U.S. economy, directly employing 11.5 million workers as of January, according to the Labor Department. Manufacturers have managed to increase their business through major productivity gains after cutting jobs deeply in the recession.

The service sector employs about 95 million workers but remains hamstrung by weakness in major industries like retail, finance, construction and transportation.

A similar effect was seen after the 2001 recession, says Brian Bethune, an economist at IHS Global Insight. Then, though, the red-hot housing market provided some offset.

This time around, Mr. Bethune points out, the housing market's collapse is one of the primary drags on service-sector activity. ISM's nonmanufacturing index has barely managed in recent months to stay above the 50 break-even level that signifies expansion. ISM's employment index looks even worse, stuck at 44.6 as of January.

To be sure, there is often a gap between pickups in manufacturing activity and pickups in broader demand for services. But an estimated nine months into the recovery, economists are getting impatient for signs of service-sector strength. If that doesn't materialize, risks mount that the recovery could lose momentum.

For that reason, investors who typically overlook the monthly nonmanufacturing report might want to start paying it closer heed.