The service sector is in expansion for the second straight month, with the diffusion index sitting at 53. Anything over 50 is in expansion. Let's take a look at some tables from the February 2010 Non-Manufacturing ISM Report On Business®.

* Non-Manufacturing ISM Report On Business® data is seasonally adjusted for Business Activity, New Orders, Prices and Employment. Manufacturing ISM Report On Business® data is seasonally adjusted for New Orders, Production, Employment, Supplier Deliveries and Inventories.

** Number of months moving in current direction

NMI (Non-Manufacturing Index)

In February, the NMI registered 53 percent, indicating growth in the non-manufacturing sector for the second consecutive month. A reading above 50 percent indicates the non-manufacturing sector economy is generally expanding; below 50 percent indicates the non-manufacturing sector is generally contracting.

NMI HISTORY

INDUSTRY PERFORMANCE (Based on the NMI)

The nine industries reporting growth in February based on the NMI composite index -- listed in order -- are: Information; Arts, Entertainment & Recreation; Transportation & Warehousing; Public Administration; Professional, Scientific & Technical Services; Other Services; Retail Trade; Wholesale Trade; and Finance & Insurance.

The eight industries reporting contraction in February -- listed in order -- are: Educational Services; Health Care & Social Assistance; Management of Companies & Support Services; Construction; Utilities; Accommodation & Food Services; Real Estate, Rental & Leasing; and Mining.

While clearly the best report in years, it is a mixed bag. Moreover it is hard to tell if February is an outlier or just sideways consolidation based on easier year-over-year comparisons.

City, State Cutbacks Coming

The service sector started to expand in September 2009, but went nowhere for 5 months. Of course, every expansion starts somewhere. However, the effect of city and state cutbacks which I guarantee are coming, have not yet been felt.

For example, please consider Governor Christie: "Time to Hold Hands and Jump Off the Cliff"

In an amazingly candid appraisal of the sorry state of affairs in New Jersey, Governor Chris Christie laid it on the line in a speech to about 200 mayors at the New Jersey League of Municipalities.

The speech is 24 minutes long and well worth a listen because it is both an honest admission of the problem, and a refreshingly accurate appraisal of what the solutions are. He chastised the legislature, unions, municipalities, and affordable housing initiatives while promising to do something about all of those.

You have to listen to the speech to believe it.

Points Covered

• He froze aid to schools
• Challenged school boards
• Wants to change arbitration rules for public workers
• Requests public-private salary and benefits parity
• Demands pension reform
• Property tax hikes not an option
• Wants to get rid of programs like COAH
• Is not thinking about the next election

I applaud Chris Christie. Not only is he saying the things that need to be said, he is acting with executive actions, freezing 375 government programs out of 378 suggestions. That is leadership, something sadly lacking from president Obama and Congress.

Regardless of how you feel about it, city, state, and municipality cutbacks are coming.

15,000 Layoffs Coming In San Francisco

Even San Francisco recognizes the need to do something about budget constraints. Bear in mind most of those 15,000 workers will be rehired, but at reduced hours. Please consider Up to 15,000 City Workers Bracing for Pink Slip Friday.

As many as 15,000 unionized city workers are anticipating layoffs on Friday in part of a work-week reduction plan in which most of them will be re-hired at reduced, 37.5-hour weeks.

The 3,000-strong Local 21, meanwhile, claims that such a forced work week reduction would be a violation of their contract -- though labor says the City Attorney disagrees. Vallejo promised "We'll lawyer up" if members are dismissed as part of the 37.5-hour scheme.

Similar themes are playing out across the country.

Please consider Ohio Mayor Seeks To Eliminate Public Unions

Mayor Robart: "...As we can see from the desperate economic and fiscal woes of California, New Jersey, New York and other states with dominant public unions; this has become a major problem for the U.S. economy and smaller “d” democratic governance. The agenda for American political reform needs to include the breaking of public unions' power to capture an even larger share of private income."

With the above articles in mind, and you can easily find thousands more article about forced layoffs at the city, state, and local level, let's return once more to the ISM report.

Services Employment

Employment activity in the non-manufacturing sector contracted in February for the 26th consecutive month. ISM's Non-Manufacturing Employment Index for February registered 48.6 percent. This reflects an increase of 4 percentage points when compared to the seasonally adjusted 44.6 percent registered in January.

Two industries reported increased employment, nine industries reported decreased employment, and seven industries reported unchanged employment compared to January.

The industries reporting an increase in employment in February are: Retail Trade; and Transportation & Warehousing. The industries reporting a reduction in employment in February -- listed in order -- are: Educational Services; Real Estate, Rental & Leasing; Mining; Accommodation & Food Services; Utilities; Health Care & Social Assistance; Information; Public Administration; and Wholesale Trade.

Inventory Replenishment

The only services industries reporting an increase in employment are the two industries that would show the strongest growth in an inventory replenishment cycle, trade and transportation.

Let's not confuse inventory replenishment with the start of a robust expansion.

Public Sector About To Play Catchup

From a jobs perspective, let's also not get too carried away in thinking a big round of hiring is coming. Instead, it's time to think that the public sector is about to play catchup to the private sector on the downside.

It's a must needed adjustment and one that will happen whether anyone wants it or not. Layoffs and benefit reductions in the public sector have barely begun. This will put pressure on jobs and wages for years to come.