Service Industries in U.S. Probably Accelerated in April

Service industries in the U.S. probably accelerated in April, a sign the biggest part of the economy is weathering increases in fuel prices, economists said before a report today.

The Institute for Supply Management’s index of non- manufacturing companies rose to 57.5 from 57.3 in March, according to the median estimate of economists surveyed by Bloomberg News. Another report may show companies added 198,000 workers to payrolls last month.

Gains in employment and stock prices, along with falling debt levels, are helping to underpin the consumer spending that makes up 70 percent of the economy. Still, gasoline prices at their highest levels in almost three years are blunting purchases of other goods and services, one reason why the Federal Reserve last week said it would maintain record monetary stimulus after ending bond purchases in June.

“Things are still getting better in the services sector,” said Neil Dutta, an economist at Bank of America Merrill Lynch in New York. “The real question is when does the rise in gasoline prices start to bite.”

The Tempe, Arizona-based ISM’s report is due at 10 a.m. New York time. Estimates in the Bloomberg survey of 73 economists ranged from 54.5 to 59. Readings greater than 50 signal growth. Last month’s projected figure would be the third-strongest in the recovery that began in June 2009.

Data from ADP Employer Services, due at 8:15 a.m., will show the increase in private payrolls last month was close to the 201,000 March gain, according to the Bloomberg survey of economists.

Previous Expansion

ISM’s index of services industries, which account for almost 90 percent of the economy, averaged 56.1 in the five years to December 2007, when the last recession began.

Fueled by spreading unrest in the Middle East, the average price of a gallon of regular gasoline at the pump advanced to $3.97 on May 2, the highest since July 2008, according to data from AAA, the nation’s biggest motoring group.

Forced to spend more for food and fuel, household purchases have cooled. Consumer spending adjusted for inflation rose at a 2.7 percent annual pace in the first quarter, down from 4 percent in the last three months of 2010, the Commerce Department said last week.

The ISM services survey covers industries that range from utilities and retailing to health care, finance and transportation. Today’s report will follow the group’s May 2 figures that showed manufacturing grew more than forecast in April, driven by gains in exports and inventories.

Current Expansion

The services gauge has averaged 53.1 since the recovery started in June 2009 through March, trailing the 56.2 reading on the group’s factory measure during the same period.

Retail stocks have underperformed machinery and equipment makers this year. The Standard & Poor’s 500 Consumer Discretionary Index has gained 8.2 percent so far this year, compared with an 11 percent gain for the S&P Supercomposite Machinery Index.

The factory rebound, which is driven by exports and corporate investment, is generating more demand for services. Companies like restaurants and airlines are seeing enough demand to pass increased costs onto consumers.

Denver-based Chipotle Mexican Grill Inc. (CMG), the burrito chain spun off from McDonald’s Corp. in 2006, last month reported a 23 percent gain in first-quarter profit as consumers dined out more. The company raised prices last quarter on the West coast and plans to begin increasing prices elsewhere to recover higher costs.

Raising Prices

“We continue to believe we have pricing power, but we want to be patient and allow our transactions to hold as strong as possible in this still-recovering economy,” Chief Financial Officer John Hartung said on an April 20 conference call.

The economy probably generated 185,000 jobs in April after gaining 216,000 the prior month, according to the median estimate of economists surveyed by Bloomberg before the Labor Department’s May 6 report.

Companies are turning more optimistic about hiring. Oak Brook, Illinois-based McDonald’s Corp. (MCD), the world’s largest restaurant chain by revenue, sought as many as 50,000 workers in the U.S. during its National Hiring Day event on April 19.

“The economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually,” the Fed said last week after its latest policy meeting. “Household spending and business investment in equipment and software continue to expand.”

                Bloomberg Survey

============================================
                               ADP  ISM Non-
                           Payroll     Manu
                            ,000’s    Index
============================================
Date of Release              05/04    05/04
Observation Period           April    April
--------------------------------------------
Median                         198     57.5
Average                        194     57.3
High Forecast                  240     59.0
Low Forecast                   164     54.5
Number of Participants          34       73
Previous                       201     57.3
--------------------------------------------
4CAST Ltd.                     170     56.0
ABN Amro Inc.                  190     57.5
Action Economics               200     58.0
Ameriprise Financial           190     56.5
Banesto                        205     57.9
Bank of Tokyo- Mitsubishi     ---      57.0
Bantleon Bank AG              ---      57.5
Barclays Capital              ---      58.0
Bayerische Landesbank         ---      57.5
BBVA                          ---      58.0
BMO Capital Markets           ---      57.3
BNP Paribas                    165     56.5
BofA Merrill Lynch             180     58.0
Briefing.com                   200     57.5
Capital Economics             ---      56.5
Citi                          ---      56.0
ClearView Economics           ---      57.0
Commerzbank AG                 200     57.0
Credit Suisse                 ---      56.5
Daiwa Securities America      ---      57.0
DekaBank                      ---      58.3
Desjardins Group              ---      57.3
Deutsche Bank Securities      ---      57.0
Deutsche Postbank AG          ---      58.0
DZ Bank                        185     57.0
Fact & Opinion Economics       220     58.0
First Trust Advisors          ---      58.3
FTN Financial                 ---      57.5
Goldman, Sachs & Co.          ---      57.5
Helaba                        ---      57.0
High Frequency Economics       200     ---
HSBC Markets                   240     56.0
Hugh Johnson Advisors          200     59.0
IDEAglobal                     175     58.0
IHS Global Insight            ---      57.0
Informa Global Markets         180     57.4
ING Financial Markets          220     58.5
Insight Economics              225     57.0
Intesa-SanPaulo               ---      58.0
J.P. Morgan Chase             ---      58.0
Janney Montgomery Scott        200     ---
Jefferies & Co.               ---      58.0
Landesbank Berlin             ---      56.3
Landesbank BW                  210     57.5
Maria Fiorini Ramirez         ---      56.5
MF Global                     ---      57.0
Mizuho Securities              175     57.0
Moody’s Analytics              175     58.9
Morgan Stanley & Co.          ---      58.8
National Bank Financial       ---      58.0
Natixis                        195     58.5
Nomura Securities              200     56.0
Nord/LB                        190     55.5
OSK Group/DMG                 ---      58.0
Parthenon Group                164     57.5
Pierpont Securities           ---      58.8
PineBridge Investments        ---      57.0
PNC Bank                      ---      56.5
Prestige Economics            ---      57.0
Raymond James                 ---      56.0
RBC Capital Markets           ---      58.5
RBS Securities Inc.           ---      58.2
Scotia Capital                 180     58.5
Societe Generale               235     54.5
Standard Chartered             200     58.0
State Street Global Markets    188     57.8
Stone & McCarthy Research     ---      55.7
TD Securities                  170     56.0
UBS                           ---      58.0
UniCredit Research            ---      57.0
University of Maryland         200     57.3
Wells Fargo & Co.             ---      56.9
WestLB AG                      200     58.0
Westpac Banking Co.            170     57.6
Wrightson ICAP                ---      57.5
============================================

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

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

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