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The US service sector showed signs of improvement last month, contracting at the slowest pace in six months and raising hopes that the economy is beginning to emerge from the depths of the recession.
The Institute for Supply Management’s non-manufacturing index rose from 40.8 to 43.7 in April. The result beat economists’ expectations, although any reading below 50 still signifies contraction.
The results came as Ben Bernanke, chairman of the Federal Reserve, told the US Joint Economic Committee that the pace of economic contraction may be slowing and he saw “tentative signs” that final demand may be stabilising.
Services companies represent around 70 per cent of the US economy so their ability to withstand the current economic headwinds is important if the domestic economy is to begin a recovery.
“The rate of deterioration in economic conditions has moderated significantly from the virtual free-fall that existed earlier when panic and paralysis were the order of the day,” said Joshua Shapiro, chief US economist at MFR.
Economists were most hopeful about the rise in new orders and the improved employment activity, with four sectors reporting an increase in employment. New orders rose by 8.2 percentage points on the ISM index, while employment climbed by 4.7 percentage points.
Overall seven industries reported growth in April compared with just one the prior month.
“The improvement in the non-manufacturing version is encouraging as all recoveries have to start somewhere,” said Paul Ashworth, senior US economist at Capital Economics.
The figures on Tuesday mirrored last week’s positive results from ISM’s manufacturing index. That data showed that activity at factories is still declining but at the slowest pace for seven months. The index has been below 50, which indicates that the sector is shrinking, for 15 months but rose to 40.1 in April from 36.3 in March.