Service Industry Expansion in U.S. Likely Near the Fastest Rate Since 2005

Service industries probably grew in March at close to the fastest pace in more than five years, an indication the U.S. economic expansion is broadening beyond manufacturing, economists said before a report today.

The median forecast in a Bloomberg News survey for the Institute for Supply Management’s non-manufacturing gauge is 59.5 after a 59.7 reading in February that was the highest since August 2005. A figure above 50 signals growth for the Tempe, Arizona-based ISM’s measure.

Accelerating job growth may help sustain household spending, which faces headwinds from higher food and fuel bills. Federal Reserve officials said last month the economy is on “firmer footing,” diminishing the need to extend a bond purchase program beyond June.

“The economy is expanding, albeit slowly, but in a steady sort of way,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “I would expect the ISM services index to continue a little bit higher than its current level and then stabilize in the low 60s area” in coming months, he said.

The ISM report is due at 10 a.m. New York time. The 68 estimates in the Bloomberg survey ranged from 57.7 to 61.

The supply managers’ group reported on April 1 that its manufacturing index expanded last month at close to the fastest pace in almost seven years.

Manufacturing Index

The factory gauge was little changed at 61.2 after a February reading of 61.4 as production rose to the highest level since January 2004. The strength in the industry is generating greater demand for services, which account for almost 90 percent of the economy, benefiting companies like FedEx Corp. (FDX)

Memphis-based FedEx, which operates the world’s biggest cargo airline, said March 17 that its per-share earnings for the fiscal fourth quarter ending May 31 will be $1.66 to $1.83 a share.

“Our businesses are performing strongly in the United States, where industrial production growth is expected to approach nearly 5 percent in 2011, outpacing GDP and supporting overall transportation volumes,” Fred Smith, chief executive officer of FedEx, said in a teleconference.

The Standard & Poor’s Supercomposite Transportation Index, which includes companies like Union Pacific and FedEx, has increased 23 percent in the last 12 months, compared with a 12 percent gain in the broader S&P 500 Index. (SPX)

Equipment Transportation

The economic expansion is extending to smaller businesses. Matt Ziegler, president of ZMac Transportation LLC, said demand to move mining equipment and parts of vessels this year is bucking the annual trend.

“The first few months of the year were always challenging,” Ziegler, who’s been in the freight-logistics business for about 12 years, said from his company’s offices in Racine, Wisconsin. “Historically, January and February are slow months. This year, it’s not that way at all. We’ve got a lot more positive reception to our sales calls in the last few months than we have in past years.”

The U.S. economy added more jobs than forecast in March and the unemployment rate unexpectedly declined to a two-year low of 8.8 percent, an indication that the labor-market recovery is strengthening, Labor Department figures showed April 1.

Payrolls increased by 216,000 workers in March after a 194,000 gain the prior month. Economists projected a March gain of 190,000, according to the median estimate in a Bloomberg survey. Service providers added 185,000 workers last month, the most since May 2010.

Higher Food, Fuel

Employment gains may help Americans dealing with higher food and gasoline prices. The average cost of a gallon of regular-grade fuel reached $3.66 on April 3, the highest since September 2008, according to AAA.

The Fed, after its latest policy meeting March 15, pledged to continue its program of purchasing $600 billion of bonds before the second half of the year, in order to “promote a stronger pace of economic recovery.” Fed officials also said the economy was on “firmer footing” and acknowledged a rise in commodity prices, signaling deflation risk had diminished and they were unlikely to expand the bond purchase plan.

The Fed will release minutes of the March meeting today at 2 p.m. in Washington.

          Bloomberg Survey

==================================
                          ISM Non-
                              Manu
                             Index
==================================
Date of Release              04/05
Observation Period           March
----------------------------------
Median                        59.5
Average                       59.5
High Forecast                 61.0
Low Forecast                  57.7
Number of Participants          68
Previous                      59.7
----------------------------------
4CAST Ltd.                    58.9
ABN Amro                      59.0
Action Economics              60.0
Aletti Gestielle              60.0
Ameriprise Financial          60.5
Banesto                       60.0
Bank of Tokyo- Mitsubishi     60.2
Bantleon Bank AG              60.2
Barclays Capital              61.0
Bayerische Landesbank         59.5
BBVA                          59.5
BMO Capital Markets           59.5
BNP Paribas                   60.5
BofA Merrill Lynch            60.5
Briefing.com                  59.0
Capital Economics             59.0
Citi                          58.0
Commerzbank AG                59.5
Credit Suisse                 58.5
Daiwa Securities America      59.5
Danske Bank                   58.7
DekaBank                      59.5
Desjardins Group              58.5
Deutsche Bank Securities      60.0
Deutsche Postbank AG          59.4
Fact & Opinion Economics      60.2
First Trust Advisors          60.0
FTN Financial                 58.5
Goldman, Sachs                59.0
Helaba                        58.0
HSBC Markets                  60.0
Hugh Johnson Advisors         60.0
IDEAglobal                    60.0
Informa Global Markets        60.2
ING Financial Markets         59.5
Insight Economics             60.0
Intesa-SanPaulo               60.1
J.P. Morgan Chase             59.0
Janney Montgomery Scott       59.3
Jefferies & Co.               61.0
Landesbank Berlin             58.2
MF Global                     59.0
Moody’s Analytics             59.0
National Bank Financial       60.0
Natixis                       61.0
Nomura Securities             60.0
Nord/LB                       59.7
OSK Group/DMG                 58.8
Parthenon Group               58.4
Pierpont Securities           60.0
PineBridge Investments        58.0
PNC Bank                      59.0
Prestige Economics            60.0
Raymond James                 59.5
RBC Capital Markets           58.7
RBS Securities                59.5
Scotia Capital                59.0
Societe Generale              60.3
Standard Chartered            61.0
State Street Global Markets   60.3
Stone & McCarthy Research     57.7
TD Securities                 61.0
UBS                           59.0
UniCredit Research            59.0
University of Maryland        59.9
Wells Fargo                   60.0
WestLB AG                     60.0
Wrightson ICAP                59.0
==================================

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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