U.S. service sector operates at highest level in almost two years

The service sector, where most Americans work, operated in January at the highest level in almost two years.

Activity climbed to a reading of 58.7% last month on a seasonally adjusted basis, according to a report Wednesday from the Institute for Supply Management, up a full percentage point from 57.7% in February.

Last month’s gain came as a surprise to economists who had been looking for a slight decline given that the country was battling a severe resurgence of virus cases in January. Any reading above 50 signals expansion in the services sector.

And it was the highest reading since February 2019, when the index hit 58.8%. January was the eighth straight month of growth after sharp spring declines as the global pandemic broadsided the U.S. economy.

There were 14 industries reporting growth to start the year, led by the real estate sector. Only four industries contracted with the biggest declines in arts, entertainment and recreation.

The strength was driven by a jump in new orders and from an increase in employment, although various businesses indicated during the survey that the coronavirus was still having an impact.

“Many of our restaurant locations remain completely shut down to on-site dining,” one said, but added, “We remain optimistic about business trends beyond April-May 2021.”

Anthony Nieves, chair of the ISM service business survey committee, said that service businesses at the moment believe 2021 will be a good year.

“As long as we don’t get derailed by other variants of the virus, we should maintain this growth and the second half of the year will be better than the first half,” he said.

The service sector, which includes everything from restaurants and retail stores to the health industry, has been hard hit by the virus. Millions of Americans were laid off and thousands of small businesses failed.

By contrast, manufacturing has fared better after initial shutdowns last spring. The ISM manufacturing index dipped slightly in January but at a reading of 58.7 remained close to its recovery highs.

Private analysts were encouraged by the increase in services sector activity.

“The stage is set for a strong rebound in the services sector heading into the summer,” said Oren Klachkin, lead U.S. economist at Oxford Economics. He said the recent drop in new virus cases as well as increased vaccinations and further aid promised in the Biden administration’s relief package would allow businesses to gradually re-open in coming months.