Strong service sector indicates economy is heating up

Up, up and away?

The ISM Non-Manufacturing Index, which gauges activity in the service sector, rose from 57.1 in December to an impressive 59.4 in January, easily topping the consensus forecast offered by Bloomberg of 57.0 and adding to the pile of evidence that the new year is beginning on a very strong note.

A reading of 50 suggests that the service sector, which accounts for most economic activity, is neither expanding nor contracting.



Adding to the positive tone of the report, new orders, which are a signal of future activity, rose 3.5 points to a robust 64.9, while production gained 1.7 points to 64.6.

More impressively, the survey may finally be detecting an increase in hiring, as employment increased 1.9 points to 54.5.

However, price pressures in the early stages of production are rising amid the pick up in the economy, as prices paid rose from 69.5 in December to an uncomfortable 72.1 in January.  Currently, there is little or no retail inflation amid weak wage gains, productivity growth and slack in the economy, but the Fed must stay vigilant as the economy continues to improve.

Strong gains on the horizon?
With Tuesday’s ISM Manufacturing Index popping above 60, coupled with five consecutive increases in service sector activity, it finally appears that the slow and uneven recovery that has done little to dent the unemployment rate over the last 18 months may finally be morphing into much stronger growth.



Anyone who has been searching for work can attest to the fact that companies are still reluctant bring on new staff.  And the uncertainty created by Washington in the form of new regulations, along with delays in extending the Bush-era tax cuts, also played a role last year, according to comments from Fed officials.

But the economy began to show new signs of life late last year, and new fiscal stimulus is in the pipeline, while the Fed shows no signs of adjusting is loose monetary policy in the near term.

With the closely-followed ISM surveys showing that activity in both the manufacturing and service economies are accelerating, a significant jump in employment growth may soon be at hand.