Services Gains Show Companies Confident in Outlook: Economy

Photographer: Victor J. Blue/Bloomberg

A waitress serves customers at the Bouchon Bakery at The Shops at Columbus Circle mall in New York. Close

A waitress serves customers at the Bouchon Bakery at The Shops at Columbus Circle mall in New York.

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Photographer: Victor J. Blue/Bloomberg

A waitress serves customers at the Bouchon Bakery at The Shops at Columbus Circle mall in New York.

Service industries in the U.S. expanded at a faster pace in May as a pickup in orders showed companies are confident demand will be sustained after a second-quarter slowdown.

The Institute for Supply Management’s non-manufacturing index climbed to 53.7 from 53.1 in April, according to a report from the Tempe, Arizona-based group today. A reading above 50 indicates expansion in the industries that make up almost 90 percent of the economy. Other figures showed private payroll growth slowed last month.

The gain in services shows the expansion is weathering a downturn in manufacturing, propelled by a housing market rebound that is driving sales at companies such as Home Depot Inc. (HD) At the same time, federal budget cuts help explain why employers are reluctant to accelerate hiring and give the economy a bigger boost.

“The services portion of the economy is stable right now,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who projected an ISM reading of 53.8. “We’ll continue to see demand that’s supportive of a 2-2.5 percent” pace of economic growth.

Stocks fell, sending the Standard & Poor’s 500 Index to a one-month low, after the reports. The S&P 500 dropped 1.4 percent to 1,608.9 at the close in New York.

Photographer: Andrew Harrer/Bloomberg

A rebound in housing that is helping bolster consumer confidence is reverberating through the rest of the economy. Close

A rebound in housing that is helping bolster consumer confidence is reverberating... Read More

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Photographer: Andrew Harrer/Bloomberg

A rebound in housing that is helping bolster consumer confidence is reverberating through the rest of the economy.

Manufacturing Slowing

Service industries are holding up as the nation’s factories struggle. The ISM’s factory index earlier this week showed manufacturing, which accounts for about 12 percent of the economy, unexpectedly contracted in May, registering its lowest reading since June 2009. The gauge fell to 49 from the prior month’s 50.7, the third consecutive decline. Fifty is the dividing line between growth and contraction.

In the U.K., services growth accelerated more than economists forecast last month as signs mount that the recovery may strengthen. A gauge of activity rose to 54.9, the highest in 14 months, from 52.9 in April, Markit Economics and the Chartered Institute of Purchasing and Supply said in London.

While Europe is showing signs of stabilizing, Australia’s economy is cooling. Gross domestic product grew 2.5 percent in the first quarter from the same three months last year, the weakest reading since the second quarter of 2011, a Bureau of Statistics report showed.

The median forecast in a Bloomberg survey called for a rise to 53.5 in the U.S. ISM non-manufacturing gauge. Estimates of the 74 economists ranged from 51 to 55 for the services index, which includes industries from utilities and retail to health care, housing and finance.

Orders Climb

The survey’s measure of new orders increased to a three-month high of 56 in May after 54.5 a month earlier. The ISM’s gauge of business activity improved to 56.5 from 55. The employment gauge declined to 50.1, the weakest since July, from 52.

“We’re still seeing a little bit of growth, but it’s slowed down based on the fact that we’ve not seen a strong uptick in the levels of business,” Anthony Nieves, chairman of ISM’s non-manufacturing survey committee, said on a call today with reporters. “There is still that degree of uncertainty in the long-term outlook.”

Another report showed companies added fewer workers than forecast in May. The 135,000 increase followed a revised 113,000 gain in April that was smaller than initially estimated, according to figures from the Roseland, New Jersey-based ADP Research Institute. The median forecast in a Bloomberg survey called for a 165,000 increase.

Service Providers

Manufacturers, construction companies and other goods-producing industries reduced payrolls by 3,000 in May, the report showed. Construction employment rose by 5,000 and factories lost 6,000 jobs, today’s report showed. Payrolls at service providers climbed by 138,000.

Uneven improvement in the economy has made it difficult to project when the Federal Reserve may make changes to its unprecedented accommodation program. Chairman Ben S. Bernanke said in a response to questions during congressional testimony on May 22 that the central bank could consider reducing the amount of its monthly purchases of Treasuries and mortgage debt within “the next few meetings” if officials see signs of sustained improvement in the labor market.

The policy-setting Federal Open Market Committee said May 1 that it will keep buying $85 billion a month in bonds to bolster growth and cut unemployment.

Growth will cool to a 1.6 percent annualized rate in the second quarter after a 2.4 percent pace in the first three months of the year, according to the median estimate in a Bloomberg survey of 73 economists from May 3 to May 8. The expansion is projected to average a 2.4 percent rate in the second half of the year.

Factory Orders

Orders placed with U.S. factories rose less than forecast in April as demand for non-durable goods dropped, probably reflecting lower fuel costs, according to a Commerce Department report in Washington today.

The 1 percent increase in bookings followed a revised 4.7 percent decline the prior month. Orders for durable goods, those meant to last at least three years, rose 3.5 percent.

At the same time, further improvement in the housing industry is helping lift retailers such as Atlanta-based Home Depot, which last month posted first-quarter profit that topped analysts’ estimates and raised its forecast for earnings this year on gains in renovation spending.

Housing Market

“With the housing market there are a lot of positives,” including property values, turnover, household formation and affordability, Francis Blake, chairman and chief executive officer of the largest home-improvement retailer, said at a May 29 conference. “Credit availability is still a major issue and what we’d hope is that over the next half a year, year or so, that that starts to improve and provide some further legs to the housing market recovery.”

The S&P/Case-Shiller index of property values increased 10.9 percent from March 2012, the biggest 12-month gain since April 2006, after advancing 9.4 percent in February, a report showed last week.

Purchases of previously owned homes also climbed in April, rising to a 4.97 million pace and the highest level in more than three years, according to the National Association of Realtors.

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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