U.S. Service Sector, Factory Orders Decline

A DKNY store in New York offers up to 90 percent off Monday. Despite deep discounts by a variety of retailers, same-store sales fell 0.8 percent for the week ended Saturday.
A DKNY store in New York offers up to 90 percent off Monday. Despite deep discounts by a variety of retailers, same-store sales fell 0.8 percent for the week ended Saturday. (By Mark Lennihan -- Associated Press)
By Annys Shin
Washington Post Staff Writer
Wednesday, January 7, 2009

The service sector contracted in December for the third consecutive month, while orders at factories fell the previous month on weakening consumer demand, according to data released yesterday that highlighted the persistent weakness in the U.S. economy.

The Institute for Supply Management said yesterday that the service sector continued to shrink last month, although at a slower pace than it had in November. Every industry in the sector contracted, with the exception of retail.

The group's index of the service sector registered 40.6 percent, not as weak as analysts had expected. Any reading under 50 percent indicates contraction; any reading above signals growth.

Wachovia economist Jay Bryson said holiday discounts may have given a tiny boost to the service industry, but he and other analysts cautioned that it should not be taken as a sign of a recovery.

"Maybe the holiday season wasn't quite as big a disaster . . . but it's not like happy days are here again," Bryson said.

"To me, it says the economy is in bad shape," said Joel Naroff, president of Naroff Economic Advisors, a consulting firm in Holland, Pa. "Maybe it's not crashing and burning, just crashing."

Customers, by and large, did not flock to after-holiday sales as retailers had hoped. Sales at stores open at least a year fell 0.8 percent in the seven days through Saturday compared with the corresponding week in 2007, according to the International Council of Shopping Centers and Goldman Sachs Group.

Sales fell despite efforts by some major retailers to turn Dec. 26 into another "black Friday," the day after Thanksgiving and the symbolic start of the holiday shopping season. J.C. Penney, for instance, opened at 5:30 a.m. and offered discounts of up to 50 percent. Macy's threw in a free 19-inch flat-screen television with the purchase of certain mattress sets.

Demand for U.S. exports has been falling, too, helping to drive orders at U.S. factories down in November by $18.7 billion, or 4.6 percent, from October, according to a government report yesterday. Although an improvement over the 6 percent decline from September to October, the decrease was larger than expected and marked the fourth consecutive monthly decline.

New orders for durable goods, such as washing machines and automobiles, decreased 1.5 percent, compared with 8.5 percent in October. New orders for non-durable goods, such as clothing, food and fuel, didn't fare much better in November, sinking by 7.4 percent.

"People have pulled back," said David Huether, chief economist for the National Association of Manufacturers. "In the beginning, the focus was on discretionary spending, big-ticket items like boats and cars. Since August, that's spilled over to other areas such as going out to eat and consumer electronics."

Analysts also said that the falling price of petroleum made the decline in non-durables look even worse than it was because it helped drive down the overall dollar value of orders.

With employers cutting production, hours and jobs, would-be home buyers sat on the sidelines in November. The National Association of Realtors said yesterday that its index of pending home sales, which tracks contracts signed on existing homes, fell 4 percent, to its lowest level since the index began in 2001.

In recent weeks, mortgage rates have fallen to 50-year lows in some parts of the country, according to the NAR, prompting a surge in applications. That activity is not reflected in the November data. Nor are low rates expected to boost sales much in December or January, said Lawrence Yun, the NAR's chief economist, adding that home sales typically lag behind interest rate changes. He said that if rates stay low or dip further, consumers may get over some of their anxiety and return to the housing market.

Many analysts are expecting the recession to gradually ease throughout 2009, but such forecasts are based on passage of a massive spending plan being proposed by President-elect Barack Obama.

Pressure to act quickly is likely to build if job losses continue to mount. Weekly figures on first-time claims for unemployment benefits and a monthly update on the nation's unemployment picture are due out later this week.

Staff writer Kendra Marr contributed to this report.

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