Economy slows down but keeps on growing

0 Comments | Oakland Tribune, Oct 4, 2007 | by Madlen Read, Associated Press

NEW YORK -- The shriveled housing market may be a drag on U.S. business activity, but it hasn't stopped it. The nation's service economy, like its manufacturing sector, slowed in September but still saw growth.

The service sector hasn't seen a month of contraction in four- and-a-half years, according to the Institute for Supply Management's monthly reports.

"I really think it throws some cold water on the notion that the economy is going to fall out of bed," said Wachovia Corp. economist Mark Vitner. "None of the numbers we've seen on the economy point to recession. It points to moderate economic growth."

The ISM's index gauging the health of non-manufacturing industries registered at 54.8 in September. That's down from 55.8 in August and below the 12-month high of 60.7 reached in June, but above 50 -- the threshold between expansion and contraction.

The trade group's index, now at its lowest point since March, was in line with economist estimates.

The service sector makes up about 80 percent of U.S. economic activity, and on Monday the ISM also reported slower growth in the manufacturing sector. With both portions of the economy losing steam, the Federal Reserve may feel inclined to lower interest rates further.

On Sept. 18, the Fed reduced a key rate by a half-point, and meets again at the end of October to decide whether to make borrowing even cheaper and, in turn, stoke spending.

The ISM reports "wouldn't prevent the Fed from cutting interest rates again," Vitner said. But he added that

they don't "scream out" for a rate cut, either.

Within the ISM's report were items that might give the Fed pause: expansion in employment and accelerating prices -- a sign that inflation might not be easing, as the central bank hopes.

The employment index logged in at 52.7 in September, up from 47.9 in August.

"It's suggesting that the employment situation may not be as bad as the August payroll data indicated," said Gary Thayer, chief economist at A.G. Edwards & Sons Inc.

After revealing a net decline in jobs in August for the first time in four years, the Labor Department will report on September payrolls Friday.

Meanwhile, the ISM report's prices index rose to 66.1 from 58.6. In August, prices for commodities like oil, metals and grains tumbled during a widespread selloff in the financial markets, and in September they bounced back.

"An uptick in inflation would reduce the Fed's flexibility," Thayer said. "But I don't think it'd change the need for the Fed to address the housing problem. ... We really don't have at this point an inflation problem, like we did a few years ago during the housing boom."

On Tuesday, the National Association of Realtors said its index of pending sales of existing homes fell 6.5 percent in August from July -- indicating that existing home sales will probably keep falling in the coming months.

The construction and real estate industries, struggling with a dismal residential housing market, said activity was flat in September compared with August.

Businesses including banking, health care, retail, utilities, transportation, and wholesale trade reported growth in September, but industries such as agriculture, professional services, and arts and entertainment said activity decreased.

The ISM said its survey respondents cited the slow housing market, budget concerns, price competition and general caution about the economy's direction as reasons why growth has moderated.

The report indicated a slowdown in imports growth, likely due to the weakening dollar and cooler U.S. demand. The imports index fell to 51.0 in September from 55.0 in August. The new orders index also showed weaker growth, dipping to 53.4 from 57.0.