Economic activity in the U.S. service sector continued to expand in the month of January, according to a report released by the Institute for Supply Management on Tuesday, although the report also showed a slowdown in the pace of growth.
The ISM said its non-manufacturing index edged down to 55.2 in January from a revised 55.7 in December, with a reading above 50 indicating growth in the service sector.
Economists had been expecting the index to slide to 55.1 from the 56.1 originally reported for the previous month.
Anthony Nieves, chair of the ISM Non-Manufacturing Business Survey Committee, said, "According to the NMI, eight non-manufacturing industries reported growth in January."
"Respondents' comments are mixed about the economy and business conditions; however, the majority of respondents are optimistic about the overall direction," he added.
The drop by the headline index came as the business activity index slid to 56.4 in January from 60.8 in December and the new orders index fell to 54.4 from 58.3.
While the inventories index and the backlog of orders index also decreased compared to the previous month, the employment index climbed to 57.5 in January from 55.3 in December.
The increase by the employment index indicates a modest acceleration in the pace of job growth in the service sector.
On the inflation front, the prices index rose to 58.0 in January from 56.1 in December, pointing to a faster rate of price growth.
Paul Dales, Senior U.S. Economist at Capital Economics, said the modest drop by the non-manufacturing index was probably a result of the drag on retail spending from the payroll tax hike.
"But this blow has been small and cushioned by stronger demand in other sectors, namely construction," Dales said. "This explains why the headline index is still consistent with a rebound in annualized GDP growth from the 0.1% fall in the fourth quarter to around a 2.5% rise in the first."
He added, "So although the payroll tax hike will hit consumption growth, it won't trigger a second consecutive quarter of contracting GDP."
Last Friday, the ISM released a separate report showing that activity in the U.S. manufacturing sector expanded for the second consecutive month in January, with the index of activity in the sector reaching a nine-month high.
The ISM said its purchasing managers index rose to 53.1 in January from a revised 50.2 in December. Economists had expected the index to come in unchanged compared to the 50.7 originally reported for the previous month.
With the increase, the index of activity in the manufacturing sector rose to its highest level since reaching 54.1 in April of 2012.
by RTT Staff Writer
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