Non-Manufacturing Weakened at Mid-Year

In July of this year, even the service sector of the U.S. economy was showing the strain of an excruciatingly sluggish economic recovery. Overall U.S. economic conditions had grown steadily (if only slowly) better as we moved through the spring and early summer. But a combination of factors, including corporate accounting scandals and plunging equity values, threw the recovery for an at-least-temporary "loop" as we entered the second half of 2002.

The non-manufacturing-focused survey conducted by the Institute for Supply Management (ISM) during the month of July showed that business activity continued to expand, but just barely, and at its slowest rate since the first month of this year.

The composite Business Activity Index (BAI) compiled by the ISM came in at a level of 53.1 during July. This was a reading more than four points lower than the month before, but still comfortably above the 49.6 level registered during the first month of the new year. Any reading above the neutral (no change) level of "50" reflects growth in business activity for the non-manufacturing sector of the economy.

The fact that the second-quarter-2002 average index came in at a level of 57.5, well above the break-even point, is encouraging from a longer-term perspective. But the July reading showed all sectors of the economy, not just skittish manufacturing industries, to be increasingly vulnerable to any more bad news.