Wednesday, November 3, 2010

Service sector still healthy, but trailing the manufacturing sector

After a few months of disturbing weakness, the ISM survey of the service sector shows that business activity is once again improving, though not yet strongly.

Over two thirds of those surveyed in both the service and the manufacturing sectors are reporting paying higher prices. This adds to the growing mountain of evidence that deflationary pressures are almost nowhere to be found. Instead, it is a warning that firms are likely to begin passing along to consumers the higher prices they are paying for inputs (some firms are already doing this, e.g., General Mills, Starbucks, MacDonald's, Kimberley Clark and Goodyear).

This last chart shows the employment component of the ISM service sector report. In contrast to the manufacturing sector, where a clear majority of firms say they are hiring, only a slim majority of service sector firms report increased hiring activity. We thus have a clear divide between the two sectors of the economy, with the manufacturing sector looking a lot healthier and more dynamic than the service sector (which is of course by far the largest sector). This helps explain why overall employment growth remains sluggish.

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