Service sector contracting again

But drop in jobless claims is encouraging

Following two months above 50 – the level that marks the line between contraction and expansion, the ISM Non-Manufacturing Index showed that the broad-based service sector contracted last month.

The closely-followed survey fell from 50.6 in October to 48.7 in November, below the Bloomberg forecast of 52.0.  The economic recovery has been modest thus far, and some analysts expected a double-dip recession. 

Weakness in the service sector last month, which accounts for most of the country’s GDP, bolstered their case, as the index has slipped for two consecutive months.

Jobless claims point to further economic gains

However, today’s report on jobless claims paint a different picture.  Weekly initial jobless claims remain in a downward trend, falling another 5,000 to 457,000, the lowest reading since September 2008.

The 4-week moving average dropped 14,250 to 481,250, but continuing claims increased 28,000 to 5,465,000.

The labor market has taken a  beating in the recession, and the unemployment rate now stands above 10%. Moreover, companies have shed over 7 million jobs since the recession began, according to data published by the government.

But the improvement in jobless claims is a clear indicator that companies are growing more optimistic about the recovery, and we may see further gains tomorrow when the government provides the latest on the labor market.

A reversal in the positive trend for weekly jobless claims would be disconcerting, signaling a worsening in the employment situation and a return to a contracting economy, but in my view, that is unlikely to happen.