ISM Lacks Support

The Institute for Supply Management's monthly index on nonmanufacturing conditions fell to 52.4 in March compared to 54.3 in February, the lowest level since April 2003. The decrease is the result of slippage in a variety of major categories, including new orders and employment.

The low reading puts the spread between the ISM's manufacturing and nonmanufacturing indices at a skimpy 1.5 points instead of its usual 5 points, suggesting that the service sector might be joining the manufacturing sector and slipping toward weakness.

I have long discussed the importance of trends in the service sector to the overall job and income story, which recently has helped to explain how the U.S. economy has been able to maintain fairly healthy job growth despite slowing in the economy. It is notable, for example, that personal spending on services increased at a 3.3% pace in the final three quarters of 2006, about a percentage point higher than the growth rate in the overall economy. If this trend changes, job growth will falter and so too will the economy's ability to withstand headwinds such as high energy costs and the weak housing market.

Ten of the survey's 14 industries reported growth during the month, including the construction sector. The four that contracted included the management of companies and support services; accommodation and food services; information; and arts, entertainment and recreation industries.

Notable components included the new orders component, which fell to 53.8 from 54.8 in February, its lowest since August. In addition, the employment component fell to 50.8 from 52.2 in February, its lowest since July 2004.

The market response to the ISM index would probably be greater if not for the lack of key supporting data. In particular, the recent decline in jobless claims and today's report on employment conditions released by ADP stand in contrast. This is nonetheless a trend that bears watching given the importance of the service sector to the job story.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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