Service sector activity plummets

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The service sector saw a considerable decline in January, marking the first period of negative growth in nearly 5 years.

NEW YORK (CNNMoney.com) -- New recession alarms shook Wall Street Tuesday as a key survey of service sector executives showed business activity retreating in January for the first time in nearly five years.

The Institute for Supply Management's (ISM) non-manufacturing index came in with a reading of 44.6, a new summary number for the report.

The 44.6 summary number is a new reading that does not have comparable readings from past reports.

The reading for business activity in the service sector plunged to 41.9 in January from 54.4 in December. Economists surveyed by Briefing.com had forecast a reading of 53.

A reading above 50 indicates growth in the sector, and a reading below 50 represents a sector-wide decline. The January reading is the first below 50 since March 2003.

The business activity reading also experienced the largest month-to-month drop in the 10-plus year history of the index.

Tuesday's report was issued roughly an hour earlier than its usual 10 a.m. release time because someone who was familiar with the report had inadvertently made a comment about it on Monday night. ISM chose to be cautious and released the report before markets opened Tuesday, an ISM spokeswoman told CNNMoney.com.

Signs of a recession. Both the 41.9 business activity reading and the 44.6 summary number represent the second lowest growth figures on record, trailing only the October 2001 reading after the Sept. 11 attacks. It's a sign that the service sector - which has carried the economy through a downturn in manufacturing - has followed that troubled sector into decline.

The enormous drop in business activity has intensified some economists' fears.

"We don't have plunges like this unless we're coming into or [are] in a recession," said Sam Bullard, economist at Wachovia. "Until we see two consecutive monthly declines, it's hard to definitively say we're in a recession, but these numbers make you think."

The service sector encompasses the retail, transportation and health care sectors. It also includes sectors that have been hit hard by problems in the economy, including finance, real estate and construction.

"The service sector is a much larger component of the economy [than manufacturing], and this is very much a recession reading," said Keith Hembre, chief economist for First American Funds, who now believes the U.S. economy has fallen into recession.

Some recent unexpected growth. Last Friday the more closely watched ISM Manufacturing reading came in at a 50.7 reading for January, up from 48.4 in December, showing an unexpected return to growth in that sector. This marks only the sixth time in the report's history that the service sector has recorded lower growth than the manufacturing sector, and it's by far the largest margin by which the service sector has trailed manufacturing.

Scary employment signal. The report also set off more alarms about the nation's labor markets, since it has been the service sector that has provided most of the job growth in recent years as factories closed or cut employment.

The ISM report showed 24% of service-sector employers had fewer employees than a month earlier, nearly double the 13% who were trimming staff in the previous reading. Only 6% were adding staff, down sharply from the 16% doing so in December. The report said employment comments on the survey included "Did not replace some positions"; "Reduced headcounts with hiring freezes in place"; and "Layoffs."

Friday the government's January employment report showed employers trimmed 17,000 jobs in the month, the first decline in employment in more than four years. But the service sector continued to add jobs in the government reading, while manufacturing and government employers trimmed their staffs.