Service Sector and Personal Consumption Expenditures

National income accountants include three types of spending as personal consumption expenditures: durable goods, nondurable goods, and services. Durable goods are expected to last more than 3 years; nondurable goods less than three years, and services consist of the work that lawyers, barbers, doctors, mechanics, etc. do for consumers.

As economies develop, their service sectors tend to become more important as major channels of consumer spending. Currently, the service sector in the United States makes up about 80 percent of total economic activity.

The Institute for Supply Management computes a monthly index for the services sector. The index for March rose to 60.5 over February 2006, when it was 60.1. The Institute reported that new orders increased and average prices for services dropped. The new order index rose from 56.2 in February to 59.5 in March, while the prices-paid index fell from 64.8 in February to 60.5 in March.

"The market was looking for confirmation that there might be a broad slowing of the economy under way, but the data did not reinforce that view, said Tony Crescenzi, chief bond market strategist at the Miller Tabak Company. The Institute's report also indicated stronger global demand for services, with export orders reaching the highest level in the nearly 10-year history of the institute's services survey. The industries reporting the highest increases in new export orders in March were Insurance; Entertainment; Finance & Banking; Utilities; and Business Services. No industry reported a decrease in new export orders in March.

Although some analysts say the report supports the case for another Fed interest rate hike, which could dampen economic activity, this upbeat report for the service industry points to solid momentum for continued economic growth in the near future.