Service sector shrinks further, report shows

The slumping U.S. service sector and a weakening job market dealt further blows Wednesday to an economy teetering on the brink of recession, while bad news continued unabated on the inflation front.

The U.S. service industry shrank for a second month in February, though at a slower pace, according to a report by the Institute for Supply Management that showed more improvement than expected but still painted a weak picture overall.

The U.S. private sector unexpectedly shed jobs for the first time in nearly five years in February, according to a private report that does not bode well for the government’s key employment report Friday.

The Federal Reserve said that all its districts reported decelerating economic growth in early 2008, while prices pressed upward almost everywhere in the United States.

After the economy nearly ground to a halt in the fourth quarter of 2007, the Fed’s “Beige Book” report appears to increase the odds of a contraction and more interest rate cuts to cushion the fall, though this may add fuel to inflation.

There was more unwelcome news on inflation. Although U.S. productivity in the fourth quarter was slightly better than earlier estimated, labor costs were also considerably higher, according to revised government figures.

A government report showed new orders at U.S. factories fell 2.5% in January. That was the first decline since August and comes after a separate report from the Institute for Supply Management on Monday showed the U.S. manufacturing sector contracted in February.

The institute’s non-manufacturing index came in at 49.3, above the record-low 44.6 in January but still slightly below the level of 50 that separates expansion from contraction. Economists had expected 47 for February.

The index has been below 50 for two consecutive months, the first such slump since January 2002, when the economy was still feeling the effects of the last recession.

Some were encouraged by the fact that the institute’s separate business activity index for the service sector showed expansion in February, coming in at 50.8, above January’s 41.9. The service sector accounts for about 80% of U.S. economic activity.

The jump was the biggest rebound in the business activity index since November 2001, the end of the last U.S. recession.