Services Probably Sustained Expansion: U.S. Economy Preview

Service industries in the U.S. probably kept growing in October, lifted by gains in consumer spending that are helping bolster the expansion, economists said before a report this week.

The Institute for Supply Management’s non-manufacturing index, which covers almost 90 percent of the economy, was at 54.5 last month, little changed from 55.1 in September, according to the median forecast in a Bloomberg survey before tomorrow’s figures. Readings above 50 signal growth. Another report this week may show the trade deficit widened in September as exports cooled.

Retailers Macy’s Inc. (M) and Kohl’s Corp. (KSS) may keep benefitting from a pickup in hiring and consumer sentiment heading into the holiday shopping season, while homebuilders enjoy a rebound in demand. Meanwhile, manufacturing is being restrained by a global slowdown and a lack of clarity on U.S. fiscal policy that is preventing the economy from strengthening further.

“The non-manufacturing part of the economy, which is the bulk of the economy, is a lot less weak,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics LLC in Valhalla, New York. “The manufacturing sector is more exposed to the weakening in foreign growth and exports. When you add it all up it’s still pretty sluggish growth.”

The Tempe, Arizona-based ISM’s services report will be the last piece of economic data before the Nov. 6 election, when voters decide between giving President Barack Obama another four years and changing course with Republican challenger Mitt Romney.

Labor Market

A Labor Department report last week showed the job market is strengthening. Employers added 171,000 workers to payrolls in October, more than the most optimistic projection in a Bloomberg survey, after a 148,000 gain in September. The figures showed retail hiring picked up at the same time purchases firmed.

Macy’s, the second-biggest U.S. department-store chain, said its October same-store sales increased 4.1 percent, topping the 4 percent average estimate of analysts surveyed by researcher Retail Metrics Inc. Kohl’s said its purchases climbed 3.3 percent.

Same-store sales for the more than 20 companies tracked by Swampscott, Massachusetts-based Retail Metrics rose 5 percent, excluding drugstores, beating estimates for a 4.6 percent gain, the firm said in a Nov. 1 report. That followed a 3.9 percent increase in September.

Coffee Sales

Starbucks, the world’s largest coffee-shop operator, reported record fourth-quarter revenue, while sales at stores open at least 13 months in the U.S., Canada and Latin America advanced 7 percent.

“If you look at the last few years, there is no question that the economic environment in the U.S. has been very challenging, fragile, and depending on the region, very difficult at times,” Chief Executive Officer Howard Schultz said on a Nov. 1 earnings call. Still, “we’re confident that we can continue to navigate through changes in the economy and we’ve done it now year-over-year.”

Homebuilding is another bright spot for the economy. Americans bought new homes in September at the fastest pace in two years, a sign the industry at the heart of the last recession is bouncing back, according to Commerce Department figures.

Population growth and mortgage rates pushed to record lows by Federal Reserve purchases of housing debt are generating sales for builders like Toll Brothers Inc. Housing starts in September jumped 15 percent to the fastest pace since July 2008, according to the Commerce Department.

Investors also are upbeat about prospects. The Standard & Poor’s Supercomposite Homebuilding Index advanced 81.7 percent this year, outpacing a 12.5 percent gain in the broader S&P 500.

U.S. Manufacturing

The ISM’s manufacturing index, released Nov. 1, showed factories are stabilizing. The gauge rose to a five-month high of 51.7 in October from 51.5 as orders and production picked up. A stagnant Europe and slowing growth in China has led to weaker demand for American products, which had been a source of strength for the U.S. economy.

The U.S. trade deficit probably widened in September to $45 billion from $44.2 billion in August, according to the median forecast in a Bloomberg survey. The Commerce Department is scheduled to release the data Nov. 8.

                    Bloomberg Survey

==============================================================
                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
==============================================================
ISM NonManu Index         11/5      Oct.      55.1      54.5
Cons. Credit $ Blns       11/7     Sept.      18.1      10.3
Trade Balance $ Blns      11/8     Sept.     -44.2     -45.0
Initial Claims ,000’s     11/8     3-Nov      363       370
Cont. Claims ,000’s       11/8     27-Oct     3263      3260
Import Prices MOM%        11/9      Oct.      1.1%      0.0%
Import Prices YOY%        11/9      Oct.     -0.6%     -0.4%
U of Mich Conf. Index     11/9     Nov. P     82.6      82.9
Whlsale Inv. MOM%         11/9     Sept.      0.5%      0.4%
==============================================================

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net

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

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