U.S. Services Sector Continues to Expand

The massive U.S. services sector expanded for a second straight month in March, according to data released Wednesday, adding to mounting evidence that the U.S. economy is bouncing out of a shallow recession.

Though the pace of activity in services moderated from the nearly 11/2-year peak hit in February, growth in new orders and the waning pace of job cuts suggest the sector, which includes everything from transportation to legal and financial services, may see steady growth in the months ahead.

The Institute for Supply Management, an industry trade group, said its monthly non-manufacturing index slipped to 57.3 in March from 58.7 in February, against market expectations for a 57 reading. March marks the second straight month the index has stayed above the 50 mark that indicates expansion.

“It is a pretty good report. It is telling you there is a recovery, but the big question for the markets is how much of it is inventory related and how much of it is longer lasting,” said Carey Leahey, senior U.S. economist at Deutsche Banc Alex. Brown in New York.

Restocking of warehouses, after excess inventories of unsold goods were worked down over the last year, is boosting first-quarter growth, but analysts and the Federal Reserve are uncertain whether demand is strong enough to sustain healthy growth in the second half of this year.

“On balance, we believe the recovery is underway,” Chicago Fed President Michael Moskow said. But he added that the expansion needs to see a rebound in business spending and on that front, “the timing and ultimate magnitude remain quite uncertain.”

ISM’s inventories index slipped to 50 in March, indicating material inventories were unchanged after February, when service sector companies added to their stocks for the first time in 16 months.

In February, the ISM non-manufacturing index surged to its highest levels since November 2000, capping a series of unexpectedly strong U.S. reports that prompted economists to raise their U.S. growth forecasts.

Many analysts now are looking for the United States to shoot out of a mild recession with annual growth in the first quarter expected to be between 5% and 6%.

Earlier Wednesday, a report showing vigorous activity in U.S. home loan applications despite a modest rise in mortgage rates suggested that consumer spending, barely dented by last year’s economic downturn, remains bright.