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US Services Sector Decline Halted Despite Terrorist Attacks, while Europe Services Contract for the First Time
Oct 4, 2001

Until recently, economist and business analysts followed services sector indicators of economic performance to determine how widespread and profound the downturn in economic activity was. Yet, as concerns about consumer confidence and a global recession mount in the aftermath of the September 11 terrorist attacks, interest in the performance of services industries has increased since these industries reflect more accurately any changes in demand. The services sector indicators have become leading indicators of economic performance for once.

On 3 October, the NAPM and NTC Research released the U.S., eurozone and UK purchasing managers' reports for the service sector. In the U.S. the NAPM non-manufacturing index was 50.2 in September indicating an end to the contraction of the service sector despite the September 11 attacks. This result contrasts with the eurozone reading were the NTC Research-Reuters services index was 49, indicating a contraction of the sector for the first time. In the UK the CIPS services index of economic activity declined to 48.1 from 50.9 in a continuation of a trend that started at the beginning of 2001.

In the U.S. the service sector may have hit bottom after declining for two months in a row. This provides additional evidence that recessions in the service sector tend to be short-lived, at least when compared to the performance of manufacturing which in September completed fourteen months of continued decline. Entertainment services as well as utilities and health services experienced the highest rates of growth of business activity in September. As expected, transportation and insurance experienced the highest rates of decline of business activity after the September 11 terrorist attacks. Retail trade and communications also reported a decline in business activity in September. It is important to note that close to 51% of the companies that report to the NAPM non-manufacturing index reported no change in business activity, while 26% reported an increase and 23% reported a decrease in activity. Export and import orders of services increased during September. Some of the industries reporting an increase in orders for export were finance and banking, business services, and Wholesale Trade. The industries reporting decreases in new export orders were communications, other Services including travel and tourism, and retail trade.

According to the NAPM survey of non-manufacturing activity, employment in September declined, albeit at a slightly slower rate than in August. Prices also continued to decline.

In Europe the NTC Research-Reuters services index reported a contraction of economic activity for the first time since the survey began in July 1998. Respondents of the survey pointed to the terrorist attacks in the US and the deteriorating economic conditions of the world economy as the main factors influencing the decline of the services index. The increase in employment in the European service sector , albeit at a slower rate than in previous months is an indication that the slowdown of the tertiary sector is only starting. Prices for services provided declined for the second month in a row in September. A sharp drop in German service sector prices was the main reason for the overall declines in service sector prices in Europe.

Sources: National Association of Purchasing Managers September Report of Economic Activity in the Non-manufacturing Sector. http://www.napm.org/NAPMReport/NMROB102001.cfm

NTC-Research Reuters Eurozone Indexes Covering the Service Sector. http://www.ntc-research.com/UK/Pdf/Ireland%20Services%20PMI%20PR%200110.pdf

The Chartered Institute of Purchasing and Supply Uk Purchasing Managersí Index. Report on Services. http://www.ntc-research.com/UK/Pdf/UK%20Services%20PR%200110.doc

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