Federal Reserve chairman Ben BernankeWin McNamee
There are subtle signs the U.S. service economy is stirring again.
But it's tempered by persistent fears - among economists and U.S. Federal Reserve officials - that the recovery lacks strength and momentum.
A key gauge of service sector activity turned positive in December, while a survey of private-sector employers showed the industry added 12,000 new jobs in the month.
It's good news that retailers, banks, professionals and the like are doing better.
And yet Fed officials worry a U.S. recovery could fade in the face of stubbornly high unemployment and the phasing out of government stimulus measures, according to minutes released yesterday of their Dec. 15-16 meeting.
"Some participants remained concerned about the economy's ability to generate a self-sustaining recovery without government support," the minutes revealed.
At this stage in the economic cycle, the service sector should be sprinting into recovery, not limping, as it is now, BMO Nesbitt Burns economist Michael Gregory said. And the missing ingredient is the consumer.
Americans aren't spending or borrowing much in the face of high unemployment and minimal income growth. And that's depriving the service industry of the fuel it needs to expand more rapidly.
"The United States is very much a cash economy right now, and it's not generating much cash," Mr. Gregory said.
The Institute for Supply Management reported yesterday that its index of non-manufacturing activity broke through the crucial 50-point mark last month, to a reading of 50.1 from 48.7 in November. Anything above 50 implies growth.
The average reading in the past 12 months was 46.3.
The service sector has typically rebounded much more strongly from recessions, according to Mr. Gregory. In 2001, for example, the index quickly jumped from 45 to 55 in the months after the recession ended, eventually settling into a range of 55 to 60 between 2003 and 2006, he said.
The ISM's sister survey of manufacturing, released earlier this week, also moved higher in December for a fifth straight month.
The reports ease fears that the economy might slip back into recession. But it's hardly cause for euphoria.
"The rebound should help to ease fears that the economic recovery was already fading fast," economist Paul Ashworth of Capital Economics Ltd. said.
But he pointed out that the service economy is still facing "very weak domestic demand."
And vast swaths of the service industry weren't growing at all in December, including hotels, management companies, arts and entertainment businesses, utilities, educational services, wholesalers, real estate, construction and transportation, the ISM reported.
The U.S. tumbled into such a "huge recession" that the climb out will be long and rocky, said Lawrence Mishel, president of the Economic Policy Institute, a think tank in Washington.
"As the recovery grows, we're going to see consumption growing across the board," Mr. Mishel said.
But for now, it's pretty spotty, he acknowledged.
As long as the job market remains so poor, the U.S. recovery is expected to be sluggish. While the service sector added 12,000 jobs in December, private-sector employers reported cutting 84,000 jobs in the month, according to the ADP National Employment Report.
Economists are anxiously awaiting tomorrow's release of the Labour Department's employment report for December.
Most economists expect the jobless rate to rise slightly to 10.1 per cent, up from 10 per cent. The consensus forecast is for 8,000 jobs to vanish, fewer than the 11,000 lost in November.
Fed officials agree. Minutes of the board's December meeting show that members expect "the recovery to continue." But they warned that "the pickup in output and employment growth would be rather slow relative to past recoveries from deep recessions."
As a result, Fed members expect a slow recovery in the labour market and unemployment, according to the minutes. Economists said the minutes suggest the Fed is no hurry to raise interest rates.