Service Industries in U.S. Kept Expanding in March: Economy

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Photographer: David Paul Morris/Bloomberg

A contractor builds a house at the KB Home Bella Monte community in Dublin, California.

Service industries in the U.S. grew in March, capping the strongest quarter in a year and indicating the world’s largest economy will keep generating jobs.

The Institute for Supply Management’s non-manufacturing index fell to 56 from a one-year high of 57.3 in February, the Tempe, Arizona-based group’s data showed today. Last month’s reading still topped the average for the previous economic expansion. Another report showed companies added an estimated 209,000 workers to payrolls in March.

Sales (RSTAMOM) at businesses like restaurants and retailers are climbing as an improving labor market shores up household incomes and confidence in the face of more expensive gasoline. Since mid-2011, the industries that account for almost 90 percent of the economy have outpaced gains in manufacturing, which had been at the forefront of the two-year expansion.

“No longer can we say that only manufacturing is powering the economy forward,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto, who correctly forecast the level of the index. “The general trend is very encouraging.”

Stocks fell as a drop in demand for Spanish bonds brought concern over the European debt crisis to the fore and after Federal Reserve policy makers signaled yesterday that an improving economy would cause them to refrain from additional monetary stimulus. The Standard & Poor’s 500 Index decreased 1 percent to 1,398.96 at the close in New York.

Overseas, U.K. services unexpectedly grew at a faster pace in March, adding to signs the economy avoided a recession and built momentum heading into the second quarter.

Economies Overseas

Australia’s trade account was in deficit in February for a second consecutive month as coal and metal exports slumped, the first back-to-back shortfall in two years.

An improving labor market has helped underpin demand and lift consumer sentiment in the U.S. Private employment climbed by 209,000 workers in March after a February increase of 230,000 that was more than initially estimated, according to a report today from ADP Employer Services. Service producers added 164,000 jobs last month, the data showed.

The median forecast of 69 economists surveyed by Bloomberg News projected the ISM services index would fall to 56.8. Estimates ranged from 54 to 62. The gauge averaged 55.3 during the six-year expansion ended in December 2007.

The ISM non-manufacturing survey’s employment index rose to 56.7, the second-highest since February 2006. New orders, business activity and prices all expanded at a slower pace last month.

‘Very Strong’

The index “is still at a very strong rate considering where the non-manufacturing sector evolved from over the past three years,” Anthony Nieves, chairman of the ISM’s non- manufacturing index, said in a conference call with reporters. “We’ve had a nice spike upward over the last couple of months, coming through the first quarter of 2012.”

The survey covers industries ranging from utilities and construction to retailing and finance. An April 2 report from the purchasing managers group showed manufacturing accelerated in March and factory employment also picked up.

A Labor Department report on April 6 is projected to show private employment, which excludes government agencies, increased by 215,000 in March, capping the biggest four-month gain since 2006.

Households are feeling more optimistic as a result of the pickup in hiring. The Bloomberg Consumer Comfort Index (COMFCOMF) hovered last month at the highest levels in four years.

With the labor market on the mend and confidence improving, household spending climbed in February by the most in seven months. Purchases increased 0.8 percent, Commerce Department data showed last week.

Gaining ‘Steam’

“The economy is beginning to pick up a little steam,” Mark Lemond, president and chief executive officer of Shoe Carnival Inc. (SCVL), said in a March 21 conference call. “When the customer has money in their pocket, they’re definitely willing to spend it. This bodes well for the rest of 2012 and beyond.”

The Evansville, Indiana-based retailer said it expects same-store sales to increase 5.5 percent to 7 percent in the first quarter with total revenue rising to about $220 million.

Fed policy makers see the improving economy reducing the need for new stimulus even as they stick to a plan to hold the benchmark interest rate near zero at least through late 2014.

Officials said more was needed only “if the economy lost momentum” or if inflation stays below their 2 percent inflation target, according to minutes of their March 13 meeting released yesterday in Washington. That contrasts with their January meeting minutes, in which some policy makers saw the economy requiring additional action “before long.”

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

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

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