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February 05, 2008 12:00 AM

Services sector signals recession, crushing stocks

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    U.S. stocks fell today as business activity in the U.S. services sector suddenly dropped in January to recession levels, stoking fears of an economic downturn. The Dow Jones industrial average closed down 370.03, or 2.93%, at 12,265.13; the last time the Dow lost more than 300 points in one day was Jan. 17, when the index ended down 306.95 points after a regional manufacturing survey pointed to a recession.

    The S&P 500 fell 44.18, or 3.2%, ending at 1,336.64; and the Nasdaq composite closed down 73.28, or 3.08%, at 2,309.57. All numbers are preliminary.

    The Institute for Supply Management said its non-manufacturing business activity index fell to 41.9 in January from 54.4 in December. The reading was below the level of 50 that is consistent with economic expansion.

    “This is the first contraction in the non-manufacturing sector since March 2003, when the index registered 46.3, and the lowest Business Activity Index since 40 in October 2001,” the ISM said in its monthly report.

    The data came as a surprise because the services sector, which represents the bulk of U.S. economic activity, was thought to hold up better than manufacturing. On Feb. 1, the ISM manufacturing index unexpectedly rose to 50.7 from 48.4 in December.

    David Resler, chief economist at Nomura Securities International, said the two ISM indexes use different methodologies, which may account for the difference.

    “The services-sector ISM is based on responses to a single question: Are conditions better or worse? The ISM manufacturing index is a weighted response to a series of questions,” Mr. Resler said. “No single economic report is conclusive but the worries are understandable.”

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