U.S. Economy: Service Companies Expanded Faster in July

Service industries expanded in July at a faster pace than forecast, reflecting an increase in employment that eases the risk U.S. economic growth will slacken in the second half of the year.

The Institute for Supply Management’s index of non- manufacturing businesses, which covers about 90 percent of the economy, rose to 54.3 from 53.8 in June. Readings above 50 signal expansion and the median estimate of economists surveyed by Bloomberg News called for a drop to 53. Another report showed companies added more jobs than projected last month.

Record-low mortgage rates may prevent housing from slumping much more, while July’s rebound in stock prices, the first gain in three months and the biggest in a year, will probably help underpin consumer confidence. Coming on the heels of ISM’s manufacturing data this week that showed the factory rebound cooled, the report diminishes the risk the recovery will fade.

“This should alleviate concern that we suddenly hit a wall and things are getting worse,” said David Resler, chief economist at Nomura Securities International Inc. in New York, who projected the index would rise. “We are not developing the momentum needed to get the unemployment rate down any faster, but it’s a sign we are not in danger of a free fall.”

Payrolls excluding government agencies climbed by 42,000 workers last month after a 19,000 June increase, according to figures from ADP Employer Services. Economists surveyed by Bloomberg had forecast a gain of 30,000, according to the median estimate.

Shares Gain

Stocks rose on the brighter economic outlook. The Standard & Poor’s 500 Index rose 0.6 percent to 1,127.24 at the 4 p.m. close in New York. Treasury securities fell, pushing the yield on the benchmark 10-year note up to 2.95 percent from 2.91 percent late yesterday.

The median forecast for the ISM services index was based on 77 projections. Estimates ranged from 51.5 to 54.7. The index averaged 53.7 in data going back to 1997.

The ISM non-manufacturing employment gauge climbed to 50.9, the highest level since the recession began in December 2007, from 49.7 in June. The measure of new orders rose to 56.7 from 54.4.

“The key thing in looking at this report has always been the employment index,” Anthony Nieves, chairman of the ISM services survey, said in a conference call from Beverly Hills, California, with reporters.

‘A Good Sign’

“Until we see this as a sustainable index above 50 for at least a full quarter, we won’t know exactly where we’re heading,” Nieves said. The gain in the overall index “is a good sign, especially with employment breaking above the 50 base line.”

The Labor Department in two days may report private payrolls grew by 90,000 last month while total employment fell by 63,000 due to the winding down of the decennial census, according to the median estimate of economists surveyed by Bloomberg. Unemployment probably rose to 9.6 percent from 9.5 percent, they forecast.

Nordstrom Inc., the Seattle-based department-store chain, said it replenished coats and other items that sold out during its annual “Anniversary Sale,” a sign some consumers are spending again following the economic slump.

Sales at stores open at least a year will climb 3 percent in July through September, the most since 2006, the International Council of Shopping Centers said. The trade group tracks more than 30 retailers an excluded some chains such as Wal-Mart Stores Inc. A year ago, those same-store sales shrank

Bernanke’s Outlook

Federal Reserve Chairman Ben S. Bernanke this week gave an upbeat assessment on the outlook for consumers, projecting spending would climb as wages rose.

While the U.S. has “a considerable way to go” for a full recovery, “the economy seems to have stabilized and is expanding again,” Bernanke said in a speech in Charleston, South Carolina.

The ISM services survey covers industries that range from utilities and retailing to health care, housing and finance. The group’s factory survey earlier this week showed manufacturing grew last month at the slowest pace of the year.

Data from the Commerce Department yesterday showed consumer spending and personal income were unchanged in June, further evidence the weak jobs recovery is hurting spending. Household purchases grew at a 1.6 percent rate in the second quarter, while the economy expanded at a less-than-forecast 2.4 percent pace, the government reported last week.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

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