Service Sector Grows for First Time in a Year but Doesn't Add Jobs

The nation's service businesses expanded in September for the first time in more than a year, according to a new survey, fresh evidence that the economy's apparent return to growth in late summer extended beyond factories.

The Institute for Supply Management's index of activity at non-manufacturing businesses was 50.9 in September, the group said Monday, up from 48.9 in August. Numbers above 50 indicate expansion at service businesses, while numbers below it indicate contraction. It was the first positive reading since August 2008.

The stock market rose on the day, amid the better-than-expected service sector indicator and a Goldman Sachs report that was bullish on the prospects for large banks. The Standard & Poor's 500-stock index was up 1.49 percent, to 1040.46, and the Dow Jones industrial average rose 112.08 points, or 1.18 percent, to 9599.75.

Manufacturers have been cranking up production in the past few months, according to a wide range of evidence, as orders come in to replenish depleted inventories. The service sector, by contrast, has been slower to return to growth. But the latest ISM report is evidence that service companies -- a wide-ranging group of businesses including restaurants, hospitals, insurance companies and airlines -- are starting to join the party.

"Sales are very steady and have risen some each month in the past six months," said a survey participant from an unnamed construction company quoted by the trade group. "The bottom is now here."

It is unsurprising that the manufacturing sector began growing before the service industry. While automakers might increase production because dealers' lots are empty, there is no similar dynamic for, say, an auto repair shop.

"Service businesses aren't being affected nearly as much by the inventory cycle," said Joel Naroff, president of Naroff Economic Advisors.

In a particularly good sign for the future, a component of the survey asking about new orders for future business rose even more. That index rose to 54.2 from 49.9 in August. And companies' orders backlog moved from sharp contraction to slight expansion, rising to 51.5 from 41.

But the report also contains more negative signs, particularly on the jobs front. Employment activity at services firms continued contracting, with the index coming in at 44.3, up from 43.5 in August. That conforms with other recent data indicating that conditions remain bleak in the labor market -- most notably, Friday's Labor Department report indicating that last month the unemployment rate rose to 9.8 percent and employers cut 263,000 jobs.

"There's a distinct lack of confidence out there on what the recovery will look like," Naroff said. "Businesses have no desire to rush out and start doing any hiring until they're certain the recovery is real."

Indeed, one survey participant, an unnamed retailer, indicated that business remains inconsistent. "Just when things seem to be settling a bit, a new set of pressures develops," the retailer said, according to the ISM.

Indeed, many economists are generally concerned with the unevenness in the economic recovery so far and worry that it will not be sustainable.

Once the "initial burst to growth" from lean inventories and government stimulus fades, said Paul Dales, a U.S. economist with Capital Economics, "we fear that the U.S. economy will be left without much forward momentum."