Gains in Services Signal Rebound Ahead for Growth: Economy

Photographer: Luke Sharrett/Bloomberg

Service industries picked up in March after expanding at the slowest pace in four years. Close

Service industries picked up in March after expanding at the slowest pace in four years.

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Photographer: Luke Sharrett/Bloomberg

Service industries picked up in March after expanding at the slowest pace in four years.

Service industries picked up in March as the biggest part of the U.S. economy began to recover from the unusually harsh winter weather, showing growth will speed up in the second quarter.

The Institute for Supply Management’s non-manufacturing index rose to 53.1 from a four-year low of 51.6 in February, the Tempe, Arizona-based group said today. Readings greater than 50 signal expansion. Other reports showed claims for jobless benefits rose last week, consumer confidence improved and the trade deficit widened in February.

Last month’s gain in services was paced by a rebound in hiring as companies from retailers to construction firms and government agencies filled vacancies, bolstering expectations that a report tomorrow will show the labor market improved. Combined with a pickup in orders, the figures indicate the economic expansion will strengthen after what’s shaping up to be the weakest quarter in a year.

“We have growth accelerating over the rest of the year after a weather-weakened” first quarter, said Samuel Coffin, an economist at UBS Securities LLC in Stamford, Connecticut, the top forecaster of ISM services in Bloomberg data going back two years. “We’re returning to more normal hiring activity after a long winter.”

Stocks dropped, after benchmark indexes climbed to records, as consumer and technology shares declined. The Standard & Poor’s 500 Index (COMFCOMF) decreased 0.1 percent to 1,888.77 at the close in New York.

Euro Area

Elsewhere, growth last month among euro-area service producers held close to the strongest level since 2011, according to data from London-based Markit Economics Ltd.

The European Central Bank today kept interest rates unchanged amid conflicting signals that show the economy is gradually recovering, while joblessness remains near a record high and companies are having trouble raising prices.

American shoppers began returning to stores and auto dealers in March as weather conditions improved. The pickup in optimism among service companies followed a report earlier this week showing manufacturers expanded at a faster pace.

The median projection in a Bloomberg survey of 77 economists projected the ISM services index would rise to 53.5. Estimates ranged from 50 to 55. The index has averaged 53.7 since the recession ended in June 2009.

Thirteen service industries reported growth in March, while five said business contracted.

“Despite the effects of weather on many of the respective businesses, the majority of respondents indicate that business conditions are improving,” the ISM said in a statement. “The respondents also project better business activity and economic conditions as weather conditions continue to improve.”

More Claims

Another report today showed the number of Americans filing jobless claims rose to 326,000 in the period ended March 29 from 310,000 the previous week, the fewest since Sept. 7, the Labor Department reported.

“Layoffs are still very, very low,” said Ryan Sweet, senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, and the best forecaster of claims over the past two years, according to data compiled by Bloomberg. “Claims are pointing toward an improvement in the job market. It’s evidence that the economy’s struggles this year were temporary.”

Data from the Commerce Department showed the struggles were broad-based earlier in the year. The U.S. trade deficit widened 7.7 percent to $42.3 billion in February as exports declined and imports increased.

Cutting Forecasts

Economists at Morgan Stanley in New York cut their first-quarter growth forecast to a 1.2 percent annualized rate following the trade report. That would follow a 2.6 percent advance in the previous quarter and make it the weakest period since the first three months of 2013.

The ISM’s employment gauge surged to 53.6 in March from 47.5 the month before, which was the lowest since March 2010. It was the biggest one-month gain on record, according to Anthony Nieves, chairman of the survey. The group’s measure of new orders rose to a four-month high.

“Weather has played a significant role in affecting business and specifically employment” in recent months, Nieves said on a call with reporters.

A Labor Department report tomorrow is forecast to show payrolls rose by 200,000 in March, the most since November, the median estimate in a Bloomberg survey showed.

The ISM non-manufacturing survey covers an array of industries including utilities, retailing, health care and finance that make up almost 90 percent of the economy. It also factors in construction and agriculture.

The group’s manufacturing index, released earlier this week, expanded at a faster pace as production picked up. The gauge increased to 53.7 last month from 53.2 in February.

Auto Sales

Automakers enjoyed stronger March sales after winter storms limited foot traffic at dealerships earlier in the year, according to company reports earlier this week. Cars and light trucks sold at a 16.33 million annualized rate in March, the strongest since May 2007, according to Ward’s Automotive Group.

Demand is improving along with sentiment. The Bloomberg Consumer Comfort Index rose to minus 30 in the period ended March 30 from an almost two-month low of minus 31.5 the prior week, another report showed today. A gauge of whether it’s a good time to purchase needed items improved to the highest since mid-January, while a measure of finances turned positive.

Some retailers are confident demand will pick up as the weather improves.

“As we look ahead, while winter weather has continued to impact sales in February, we’re cautiously optimistic that the improved sales trend in the bookstore will continue,” Terrance Finley, chief executive officer at Birmingham, Alabama-based Books-a-Million Inc., said on a March 20 earnings call.

The final week of March was the coldest to close out the month since 2006, according to Berwyn, Pennsylvania-based weather data provider Planalytics Inc. The winter this year was the coldest in the contiguous U.S. since 2009-2010, based on data from the National Oceanic and Atmospheric Administration.

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

To contact the editor responsible for this story: Carlos Torres at ctorres2@bloomberg.net Vince Golle

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