Service Industries in U.S. Expand at Slowest Pace Since July

Service industries in the U.S. expanded in April at the slowest pace in nine months, adding to signs that the world’s largest economy is cooling.

The Institute for Supply Management’s non-manufacturing index declined to 53.1 last month from 54.4 in March, a report from the Tempe, Arizona-based group showed today. The median forecast in a Bloomberg survey called for a decline to 54. A reading above 50 indicates expansion in the industries that make up almost 90 percent of the economy.

The report, following the group’s factory index that showed less growth among manufacturers, indicates federal budget cuts and higher payroll taxes are filtering through the economy. At the same time, a rebounding housing market remains a source of strength and is helping keep the expansion from faltering.

“We are starting to see some of the drag from fiscal tightening,” Robert Dye, chief economist at Comerica Inc. in Dallas, said before the report. The figure is “consistent with an expanding service sector, but not robustly expanding.”

Estimates of the 71 economists in the Bloomberg survey ranged from 52 to 55.1 for the index, which accounts for almost 90 percent of the economy and includes industries from utilities and retail to health care, housing and finance. Before today, the gauge averaged 53.6 since the recession ended in June 2009.

Another report today showed employers added more workers in April than projected. The 165,000 increase in payrolls followed a revised 138,000 gain in March that was bigger than initially forecast.

Employment Measure

The ISM non-manufacturing survey’s employment gauge dropped to 52 in April, the lowest since November, from 53.3. The measure of new orders were little changed at 54.5 after 54.6. A gauge of business activity decreased to 55, the lowest since June, from 56.5. The index of prices paid fell to 51.2 from 55.9.

A measure of order backlogs decreased in April to 51.5 from 54.5 in the prior month.

The ISM’s factory survey earlier this week showed manufacturing, which accounts for about 12 percent of the economy, expanded in April at the slowest pace in four months as across-the-board federal budget cuts started to pinch. The gauge fell to 50.7 from 51.3 the prior month.

Household purchases are cooling, reflecting in part the two percentage-point increase in the payroll tax that took effect at the start of this year. Consumer spending, which accounts for about 70 percent of the economy, climbed 0.2 percent in March after a 0.7 percent rise the prior month. The gain was supported by a jump in outlays for services, amid cooler-than-normal temperatures, that is unlikely to be repeated.

The Federal Reserve said this week that it will continue its record monetary policy aimed at boosting growth. The Fed announced it will keep buying bonds at a pace of $85 billion a month and is ready to raise or lower that level as economic conditions evolve.

FOMC Statement

Bond buying will continue “until the outlook for the labor market has improved substantially,” the Federal Open Market Committee said in a statement released at the conclusion of a two-day meeting in Washington. It also left unchanged its statement that it plans to hold its target interest rate near zero as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.

At the same time, the housing industry has shown further signs of healing since the end of the recession that was triggered by collapse in the mortgage market.

New-home construction climbed to its highest level in almost five years last month. Starts increased 7 percent to a 1.04 million annual rate, the most since June 2008, from a revised 968,000 pace in February. Sales of new homes rose 1.5 percent to a 417,000 annual pace in March, completing the strongest quarter since 2008.

Existing Homes

More Americans than forecast signed contracts in March to buy previously owned homes, the National Association of Realtors reported earlier this week. The index of pending home sales increased 1.5 percent after a revised 1 percent decline the prior month.

Low borrowing costs are attracting buyers who are able to access credit. The average rate on a 30-year fixed mortgage was 3.35 percent last week, the lowest since the week ended Jan. 3, according to Freddie Mac. Borrowing costs reached 3.31 percent in November, a record low in data going back to 1972.

Such demand is benefiting homebuilders such as Bloomfield Hills, Michigan-based PulteGroup Inc. (PHM)

“With five quarters of generally improving market conditions in the rearview mirror, I think it’s safe to say that a sustained recovery in demand for housing is indeed under way,” Richard Dugas Jr., PulteGroup’s chief executive officer, said on an April 25 earnings call.

To contact the reporter on this story: Michelle Jamrisko in Washington at mjamrisko@bloomberg.net

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

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