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Most economists and investors fail to realize that a) the US manufacturing
base has been almost entirely exported leaving a service sector economy, b)
services spending is highly discretionary, and c) this country has never
been through a severe recession/depression without a strong manufacturing
base. In the 30's, 75% of the workforce was still working, however I doubt
very much that a similar economic downturn would see 75% employment! This is
not something that the Fed is going to fix overnight.
Earl
NEW YORK (Reuters) - A key gauge of U.S. service sector activity fell
sharply to a record four-year low in August, according to a report on
Thursday that suggested vast swathes of the U.S. economy are weakening as a
year-long slowdown wears on.
A separate Labor Department (news - web sites) report said the number of
Americans remaining on unemployment benefits was at its highest in almost
nine years, signaling the labor market is deteriorating as American firms
slash payrolls to cut costs.
Figures from retailers showed consumers were more frugal in August as they
sought bargains from discount chains, stunting sales at higher-priced
department stores and specialty clothing retailers.
Thursday's National Association of Purchasing Management report clouded
building optimism for a recovery built on a rebound in an index of
manufacturing activity on Tuesday.
``The bigger picture here is maybe the service sector is taking over in
terms of the weakness,'' said Ian Morris, chief U.S. economist at HSBC
Securities in New York.
``The non-manufacturing sector is 84 percent of gross domestic product and
manufacturing is only 16 percent. So you do the math,'' Morris said.
NAPM said its monthly non-manufacturing index fell for a second straight
month to its lowest level since the survey began in July 1997. The index hit
45.5 in August, down from 48.9 in July. Economists had expected a reading of
49.4.
The drop followed a sharp bounce in NAPM's manufacturing index that had
spurred hopes of an economic recovery later this year despite showing
deterioration in industrial activity.
A reading below 50 suggests contraction in the services sector, which
includes construction, transportation, agriculture and legal and financial
services. The index was also below 50 in April, May and July.
``It is showing you ... that things are eroding very rapidly,'' said Cary
Leahey, economist at Deutsche Banc Alex. Brown, who noted that although the
services survey has not been around very long, the NAPM manufacturing
survey's methods are well-respected by economists.
U.S. stocks fell after the NAPM report was released, while short-dated U.S.
Treasuries, sensitive to the outlook for interest rates, rose on hopes the
Federal Reserve (news - web sites) will extend its rate-cutting campaign
this fall.
In an ominous sign for the months ahead, the NAPM services new orders
index -- seen as a leading indicator of future activity -- fell sharply, to
45.9 from 48.6 in July, and matched a low set in April.
``The outlook is for continued slowdown in non-manufacturing not only due to
the manufacturing sector but for the economy in general,'' said Ralph
Kauffman, director of the NAPM non-manufacturing survey, in a conference
call with reporters.
Kauffman added that it was too early to say whether the rise in NAPM's
manufacturing index for August earlier this week really was an indication of
a turning point.
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