Service sector reading improves

The service sector report showed a surprise increase after its sister manufacturing index hit a 28-year low.

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NEW YORK (CNNMoney.com) -- Service sector activity improved in December, but remained weak amid an economy in recession, a purchasing managers' group said Tuesday.

The Institute for Supply Management's (ISM) non-manufacturing index rose to 40.6 from 37.3 in November. Economists predicted a decline to 37, according to a Briefing.com consensus survey.

The index is considered both an indicator of the sector's performance and a measure of the economy as a whole.

"It was definitely a pleasant surprise, but the index is still at very depressed levels," said Sam Bullard, economist at Wachovia.

Index readings above 50 are considered to indicate growth, while levels below 50 signal contraction. The index stood around the 50 mark for most of 2008 after it was revamped earlier in the year to account for business activity, orders, employment and supplier deliveries. The index reading fell in October and November.

Last week, the ISM manufacturing index hit a 28-year low.

In November, three of the four components to the overall index - business activity/production, employment and new orders - fell to their lowest levels since they were first reported in 1997.

In December, business activity/production inched up to 39.6 from 33 in November.

The new orders component increased to 39.9 from 35.4, and the employment component rose to 34.7 from 31.3.

But the prices index hit a record low, sinking to 36 from 36.6.

Bullard attributed the sharp November declines to a pullback in retail sales, noting "it's not that December was much better - it's just rebounding a bit."

The only industry that posted growth in December was retail trade. The 17 others - including construction, mining, and real estate - included in the index reported contraction.

Bullard said he considered the employment index as a major factor for the overall index.

"People are nervous about the unemployment report coming out Friday," he said. "If it's as bad as we expect, that essentially confirms that we'll see a further deterioration in the economy."

Bullard said a Wachovia forecast model predicted Friday's report will show 2.5 million jobs were lost in 2008 - the worst since the 2.75 million lost in 1945.

Bullard said he expected the services index to fall slightly in January. Economic contraction will continue for most of 2009, with some pickup in the second half of the year, he said. But unemployment will continue to rise for a quarter or two after the recession is over.

"Economists will say things are getting better, but the person on Main Street isn't going to see that," Bullard said.

The index will likely not reach the 50 level signifying expansion until the second half of the year, hovering at that level before even sluggish growth, he said.

"This index, like the economy, won't rebound quickly," Bullard said. "It's going to be a slow train to growth."