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Services sector expands at fastest pace since 2006

January 5, 2011 | 12:43 pm

The U.S. economy’s services sector grew in December at the fastest pace in more than four years, another sign that the recovery is picking up speed.

But an index measuring job gains in the sector was disappointing, suggesting that many businesses remain slow to hire despite better sales. Sound familiar?

The data further muddled the jobs picture ahead of the government’s official report on December employment, due Friday.

Ism The Institute for Supply Management said its overall index of activity in the services sector (charted, at left) rose to 57.1 in December, up from 55.0 in November and the highest level since May 2006.

Any reading over 50 indicates growth in the sector. The services index has been consistently above 50 for the last 12 months.

Fourteen of 17 industries reported growth for the month, including real estate, retail, transportation, entertainment and healthcare. The three services industries reporting contraction in December: agriculture, educational services and public administration (i.e., federal, state and local government).

In another encouraging sign, an index measuring the pace of new orders in the services sector surged to 63.0 last month, the highest since August 2005 and up from 57.7 in November.

ISM said company respondents in its December survey were “overall mostly positive about business conditions."

But where’s the hiring to go along with that positive attitude? The ISM’s index of services-sector employment slid to 50.5 last month from 52.7 in November. That means employment grew in December, but the pace slowed.

“The drop in the employment index . . . suggests that the general upturn in economic activity may not yet be generating new labor demand,” said David Resler, an economist at Nomura Securities.

Another report on Wednesday, however, said just the opposite: ADP Employer Services, in its monthly report on private-payroll trends, said companies added a stunning net 297,000 jobs in December -- most of them in services.

Who to believe? The decline in the ISM services employment index “suggests that the strong ADP employment number has considerable statistical distortion and should therefore be interpreted with care,” economists at Goldman, Sachs & Co. said in a note.

Still, financial markets are interpreting the day’s numbers as bullish for economic growth: Major stock indexes are at new two-year highs, the dollar is rallying and Treasury bond yields also are higher.

-- Tom Petruno

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