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Activity in the US service sector unexpectedly tumbled sharply last month for the first time in almost five years, a leading survey showed today.
The figures suggest that the Federal Reserve may have to continue to cut interest rates aggressively to stop the US falling into the worst recession since 2001.
The Dow Jones industrial average had fallen over 300 points to 12,325.37 by 7pm GMT while the FTSE 100 index in London closed down more than 2.5% to 5868.0.
The Institute for Supply Management reported its index of service sector business activity declined to 41.9 in January from 54.4 in December. Wall Street had forecast a slight slowdown but had still expected the sector to record some growth. However, the reading below the 50 mark, which separates expansion from contraction, was the first time activity in the service sector has shrunk since March 2003.
The headline index plunged from 53.2 in December to only 44.6 in January - the lowest since October 2001, just after 9/11.
"(The) non-manufacturing ISM suggests the wheels have fallen off the economy," said Julian Jessop, economist at Capital Economics.
New orders also contracted into recession territory, sliding back to 43.5 from 53.9 while the backlog of orders and inventories slipped lower - another sign of weakening activity in the sector.
The employment index also lurched down to 43.9 from 51.8.
Analysts said the services sector was taking a harder hit than manufacturing, which has been supported by overseas demand and helped by the dollar weakness compared with the more domestically reliant services sector.
However, there are signs that manufacturing is also struggling after the ISM index fell below 50 in December, before bouncing back to just above 50 in January.
Economists said the service survey suggested that current spending by US households has weakened substantially, hinting that retail sales figure next week will be very poor.
"It is also worth bearing in mind that in terms of employment and output, the non-manufacturing sector dwarfs the manufacturing sector, so is a more worrying development that more than offsets last week's good manufacturing news," said Rob Carnell at ING.
"The Federal Reserve might want to move rates in smaller steps at future meetings, but if the macro economy is deteriorating as fast and as far as this survey suggests, then markets may not allow them that luxury."
Asian markets sink after Wall Street declines
‘Unbridled pessimism’ hits Tokyo, Hong Kong; European stocks also down
BANGKOK, Thailand - Asian markets plunged Wednesday after a steep drop on Wall Street overnight fanned investors’ fears the U.S. economy was sliding into a recession that would sap demand for Asian exports.
European stocks fell modestly in early trading after having tumbled the previous day, while U.S. futures indexes were mixed.
Global investors dumped shares after figures released Tuesday showed the U.S. service sector shrank last month for the first time since March 2003. That wiped out some renewed confidence about the American economy after the U.S. Federal Reserve’s two big rate cuts late last month.
‘Unbridled pessimism’
“It’s unbridled pessimism,” said Francis Lun, general manager at Fulbright Securities Ltd. in Hong Kong. “Everyone is concentrating on a U.S. recession, but Europe is also looking bad.... We are in for a bear market now.”
In Hong Kong, the benchmark Hang Seng index plunged 1,339.24 points, or 5.4 percent, to close the half-day session at 23,469.46. Japan’s Nikkei 225 index tumbled 4.7 percent to 13,099.24.
Global financial markets have turbulent since the start of the year, mostly tumbling amid worries about a U.S. — and worldwide — slowdown and massive losses racked up by banks that made bad bets on securities backed by risky mortgages.
While the Fed’s rate cuts lifted many markets last week, investor confidence evaporated after the Institute for Supply Management reported that its December index of activity in the U.S. service sector, which accounts for about two-thirds of the economy there, dropped below 50, indicating contraction. The Dow Jones industrial average plunged 2.93 percent, its largest one-day percentage drop since Feb. 27, 2007.
U.S. stock index futures were narrowly mixed before trading Wednesday. Dow futures were down 2 points at 12,317, while Standard & Poor’s 500 futures were up 1 point to 1,344.
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Slump coming in Europe?
Asian investors also appeared increasingly anxious about a slump in Europe, another vital export market.
“There’s a real probability that both the U.S. and Europe will go into recession at the same time,” said Lun. “It’s a financial mess on the two continents with the subprime crisis and the SocGen debacle.”
The financial industry, already reeling from losses linked to the credit crisis, was dealt another blow last month when major French bank Societe Generale said it had lost about $7.1 billion in cleaning up unauthorized transactions by a rogue trader.
In morning trading in Europe, Britain’s FTSE-100 Index was down 0.3 percent after having dropped 2.6 percent Tuesday. France’s CAC-40 Index, which tumbled 4 percent the previous day, was down 0.2 percent, and Germany’s DAX Index was also down 0.2 percent.
Elsewhere in the Asia-Pacific, Australia’s key index fell 3.2 percent, while India’s Sensex was down nearly 3 percent. Thailand’s market slid 1.6 percent.
Some traders said Wednesday’s decline in Hong Kong was overdone and largely driven by investors keen to avoid risky exposure during the long Lunar New Year holidays. Markets in Hong Kong and Singapore were closed Wednesday afternoon and would remain shut Thursday and Friday.
Markets in China, South Korea and Taiwan were closed Wednesday through Friday for the Lunar New Year holidays.
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