Order growth weakens in service sector

The nation’s service sector expanded at a slower-than-expected rate in February amid a slowdown in new orders that economists think may help cool inflation.

The Institute for Supply Management, based in Tempe, Ariz., said Monday that its index of business activity in the service sector was 54.3, down from 59 in January. Wall Street analysts had expected a reading of at least 57 for the latest month.

A reading above 50 indicates expansion, while one below that mark signals contraction.

February marked the 47th consecutive month of business activity growth, the trade group said.

“Members’ comments in February are mixed concerning current business conditions. The overall indication in February is continued economic growth in the non-manufacturing sector, but at a slower pace than in January,” said Anthony Nieves, head of ISM’s survey committee.

The service industries covered by the ISM report represent about 80% of the nation’s economic activity, and economists are looking for the sector to be a driver of growth in 2007 as the manufacturing sector struggles with weakness in the automotive and housing industries. The service economy is diverse, encompassing banking, construction, retailing and travel, among other industries.

The data gave investors little to be excited about, although Mark Vitner, senior economist with Wachovia Securities in Charlotte, N.C., said the moderate growth may help put the brakes on inflation. He noted that the weakening of new orders in February -- to 54.8 from 55.4 in January -- indicated that businesses were being conservative as growth slowed.

New orders have ebbed consistently for the last several months. The reading was 56.2 in November, falling to 55.6 in December.

“This report, with numerous other anecdotal evidence, supports the view that there’s increasing weakness in the economy,” said Kevin Feltes, an economist with the Jerome Levy Forecasting Center in Mount Kisco, N.Y.

A continued slackening of the economy -- which is expected -- could help arrest inflation, Feltes said.

The report’s prices index moderated to 53.8 in February from 55.2 in January.

At the same time, the employment index strengthened to 52.2, up from 51.7 the month before.

The slowing growth is no reason for alarm, said Mark Zandi, chief economist at Moody’s Economy.com. The Federal Reserve raised interest rates in the last two years precisely to rein in growth, he said.

“The economy is performing exactly to the script that policymakers wrote for it,” Zandi said.

Sluggish growth will continue at least through the summer, Zandi said, with unemployment edging higher.

The industries that reported growth for February were healthcare; professional, scientific and technical services; educational services; utilities; transportation; real estate; accommodation and food services; information; and other services.

Activity decreased in February in nine other industries: mining; agriculture, forestry, fishing and hunting; arts and entertainment; construction; retail trade; management and support services; public administration; finance and insurance; and wholesale trade.

The report is “not weak by any means,” Wachovia’s Vitner said. “Half the industries are expanding. But the trend is that growth has been moderating.”