The Service Industry: Can It Prevent a Recession?

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At a time when US manufacturing and construction industries are in a slump, the service sector has achieved significant growth. Though the gains made by the sector can surely help in keeping a recession under control, they may not succeed in preventing one.

According to the latest Non-Manufacturing ISM report on business, the economic health of the service sector has improved significantly. The report says that the Non-Manufacturing Index (NMI) rose in April by 2.4 percentage points to 52%.

The marks an expansion of the index after three consecutive months of contraction. The NMI index in March was 49.6; in February it was 49.3; and in January 2008, the index was 44.6.



The report calculates the NMI index on the basis of the overall state of the sector.

Growth of Non-Manufacturing Industries

The report comprises a survey of 18 industries within the service sector. Out of these, 12 industries showed growth in April while six reported contraction.

The industries which showed gains in April are:
  1. Arts, entertainment, and recreation
  2. Real estate, rental, and leasing
  3. Professional, scientific, and technical services
  4. Agriculture, forestry, fishing, and hunting
  5. Mining
  6. Wholesale trade
  7. Public administration
  8. Educational services
  9. Construction
  10. Utilities
  11. Retail trade
  12. Information
On the other hand, financial firms, healthcare companies, and tourism-related companies reported dismal performance.

What Does the Rise in the Index Mean?

The significant expansion of the service sector in April after three consecutive contractions raises hopes that the economic slowdown may be not be as bad as previously feared. Economists were expecting the index to come in at around 49.1 for April.

The improvement in the index can for the most part be attributed to the addition of a large number of jobs last month — the first increase in jobs this year.

Reactions to the Findings

By showing such a remarkable recovery since its disappointing performance in January of this year, the index has surprised many experts in the field.

Some economists have observed that the better-than-expected service data, along with the latest positive manufacturing report, is evidence that the economic slowdown may not persist for long.

However, many refrain from reading too much into the survey. In their view, the index is volatile and the findings of one month cannot prove that the economy is out of woods.

The Contribution of the Service Sector to the US Economy

The service sector, which includes industries like banks, airlines, hotels, and restaurants, accounts for around 80% of US economic activity. The strength of the service sector can, then, provide some indication of the severity and duration of any economic recession.

Despite the economy's sluggish growth rate of around 0.6% in the last quarter, the service sector grew by 3.5%. While consumer spending on manufactured products has declined by 2.6%, expenditures on service areas such as housing and medical care rose by 3.4%.

Additionally, the report noted that while overall payroll layoffs in April were around 20,000 jobs, the service sector added 90,000 jobs. Moreover, services currently make up about 60% of the country’s gross domestic product, an increase from the 55% they accounted for in the last decade.

Conclusion

There's no denying the service sector's increasing influence on the nation’s economy, yet it is doubtful that it can sustain the economy while manufacturing is still taking a heavy beating.
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