Service Industries in U.S. Grow at Slower Pace Than Forecast

Service industries in the U.S. expanded in September at a slower pace than forecast, indicating a pause in the momentum of the biggest part of the economy before the federal government shut down.

The Institute for Supply Management’s non-manufacturing index dropped to 54.4 from the prior month’s 58.6, the biggest decrease since November 2008, the Tempe, Arizona-based group said today. A gauge above 50 shows expansion. The median estimate in a Bloomberg survey of economists was 57.

A recent rise in mortgage rates may be tempering progress in the housing market, while the first government shutdown in 17 years threatens to slow demand for everything from auto purchases to air travel. At the same time, a report this week showing the fastest pace of manufacturing since April 2011 is helping underpin demand for services.

The gain in services since the end of the second quarter is “keyed into domestic conditions in the United States, and the question is how much longer can it keep going if the economy is still growing at 2 percent,” Guy Berger, an economist at RBS Securities Inc. in Stamford, Connecticut, said before the report. “One of the factors is housing, and there is some worry that with higher mortgage rates, that might not be going at the same pace.”

Stocks fell for a second day as investors weighed data showing a decline in a service industries index and data on jobless claims while lawmakers made little progress on ending the federal shutdown. The S&P 500 decreased 0.7 percent to 1,682.52 at 10:14 a.m. in New York.

Since June

The ISM non-manufacturing gauge fell to the lowest level since June after jumping the prior month to the highest since at least January 2008. Estimates of the 75 economists in the Bloomberg survey for the September ISM services index ranged from 55 to 59. The figure includes industries that range from utilities and retail to health care, housing and finance and make up almost 90 percent of the economy.

Another report today showed fewer Americans than forecast filed applications for unemployment benefits last week, indicating U.S. employers were maintaining staff counts in the days leading up to the government shutdown.

Jobless claims rose by 1,000 to 308,000 in the week ended Sept. 28, the Labor Department said in Washington. The median forecast of 50 economists surveyed by Bloomberg called for a rise to 315,000.

Orders Drop

The ISM’s measure of new orders in the service industries decreased to 59.6 in September from 60.5 in August. A gauge of employment in non-manufacturing industries dropped to 52.7, the weakest since May, from 57.

Business activity slumped to 55.1 from 62.2, the report showed.

The ISM’s manufacturing index, released earlier this week, unexpectedly rose to 56.2, the strongest since April 2011, from 55.7 a month earlier, as employment and production measures improved.

Service industries in other parts of the world are showing signs of improvement. Services in the U.K. expanded in September, capping the best quarter for the industries in 16 years. A gauge of activity was at 60.3 after reaching a seven-year high of 60.5 in August, Markit Economics said today in London.

Euro-area services grew more than initially estimated and a Chinese gauge rose to a six-month high, separate reports showed.

Home Building

In the U.S., an increase this year in homebuilding has boosted service providers such as home-improvement retailers, furniture chains and real estate companies. Producers of furniture, appliances and building materials have also benefited.

Further progress depends in part on the outlook for borrowing costs. The rate on 30-year home loans averaged 4.32 percent in the week ended Sept. 26, the lowest in two months. It reached a two-year high of 4.58 percent in the week ended Aug. 22.

Car sales have been another bright spot in the economy. All four of General Motors Co. brands posted double-digit retail sales increases in the third quarter, Kurt McNeil, vice president of U.S. sales, said on an Oct. 1 sales and revenue call.

“The recent drop in jobless claims signals that we should see further acceleration in payrolls,” McNeil said. “Add to that an accommodative monetary policy, a recovery in housing markets, low energy prices, and rising household wealth and it’s clear that we should be in good shape going forward.”

Government Shutdown

At the same time, an extended shutdown of the government poses a risk. The U.S. government furloughed about 800,000 employees and shuttered government offices, national parks and museums after Congress failed to pass a continuing resolution to fund federal operations in the near-term.

“Any type of disruption in government operations would adversely affect government spending, business and consumer confidence, and financial markets,” Jenny Lin, a senior economist at Ford Motor Co., told reporters and analysts.

On this, GM and Ford agreed.

“If this thing drags out a couple of weeks, it starts to have more impact on customer sentiment and it starts to have a bigger impact on business,” said McNeil.

Shutdown Cost

A partial federal shutdown will cost the U.S. at least $300 million a day in lost economic output at the start, according to Lexington, Massachusetts-based IHS Inc. While that’s a fraction of the country’s $15.7 trillion economy, the effects probably will grow over time as consumers and businesses defer purchases and expansion plans.

“Let’s assume that the government shutdown is brief and we sail through the debt ceiling, then I think it matters not much at all,” Berger of RBS said. “A more realistic case is that the shutdown is a little longer, and the debt ceiling issue, nothing really bad happens, but there’s a lot of volatility that happens.”

To contact the reporter on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net

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

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Service Industries in U.S. Grow at Slower Pace Than Forecast

Patrick T. Fallon/Bloomberg

The first government shutdown in 17 years threatens to slow demand for everything from auto purchases to air travel.

The first government shutdown in 17 years threatens to slow demand for everything from auto purchases to air travel. Photographer: Patrick T. Fallon/Bloomberg