U.S. Economy: Services Expand Most in Three Months

ISM Index of Non-Manufacturing in U.S. Rose
The services survey covers industries from utilities and retailing to health care, housing, finance and transportation. Photographer: George Frey/Bloomberg

Services in the U.S. expanded in October at the fastest pace in three months, indicating the recovery is gaining strength even as central bankers loosen monetary policy.

The Institute for Supply Management’s index of non-manufacturing businesses, which covers about 90 percent of the economy, rose to 54.3 from 53.2 in September. Readings greater than 50 signal growth. A separate report showed factory orders in September climbed more than forecast by economists.

A faster expansion in services combined gains in manufacturing may encourage companies to increase hiring. At the same time, growth isn’t fast enough to cut unemployment stuck above 9 percent since the recession ended in June 2009, explaining why Federal Reserve policy makers today announced another round of asset purchases.

“The numbers signal continued moderate growth in the economy,” said Michael Moran, chief economist at Daiwa Capital Markets America Inc. in New York, who had forecast an increase in the services measure. “We should be doing better than this at this stage of the recovery. Growth is not strong enough to bring down the unemployment rate significantly.”

Treasuries and stocks rose after the Fed said it plans to expand asset purchases by $600 billion by the end of June. The Standard & Poor’s 500 Index gained 0.4 percent to 1,197.96 at the 4 p.m. close in New York. The yield on the 10-year Treasury note, which moves inversely to price, fell to 2.58 percent from 2.59 percent late yesterday.

Fed Forecast

Policy makers, in a statement accompanying their decision, said the central bank will buy an additional $600 billion in Treasury securities through June. New purchases will be about $75 billion a month and the Fed said it “will adjust the program as needed to best foster maximum employment and price stability.”

The median forecast of 76 economists surveyed by Bloomberg News projected the ISM index would rise to 53.5. Estimates ranged from 52 to 55.2.

Another report today showed U.S. companies added more jobs than forecast in October. ADP Employer Services said employment rose by 43,000 last month. The median projection in a Bloomberg survey called for a gain of 20,000. September was revised to a 2,000 decrease from a previously reported 39,000 decline.

‘Lethargic’ Job Growth

“Employment gains of this magnitude are not sufficient to lower the unemployment rate,” Joel Prakken, chairman of Macroeconomic Advisers LLC, which produces the figures with ADP, said in a statement. “Given modest growth in the second and third quarters, and the usual lag of employment behind GDP, it would not be surprising to see several more months of lethargic employment gains, even if the economic recovery gathers momentum.”

Unemployment in the U.S. was probably 9.6 percent in October for a third month and payrolls rose by 60,000, the first gain since May, according to median projections of economists in Bloomberg surveys. The Labor Department is scheduled to release its monthly jobs report on Nov. 5.

The Commerce Department said factory orders in September rose 2.1 percent. The figures also signaled spending on equipment and software, which helped the U.S. rebound from recession, may cool less than previously estimated.

The services survey covers industries that range from utilities and retailing to health care, housing, finance and transportation. The group’s factory gauge, released Nov. 1, rose to the highest level since May.

Index Average

The services index has averaged 51.6 since the current recovery started in June 2009, trailing the 55.1 reading on the group’s factory measure during the same period.

The ISM non-manufacturing employment gauge rose to 50.9 in October, matching the July level that was the highest since the recession started in December 2007. The measure of new orders increased to a three-month high.

Speculation the Fed would pump more cash into the economy has boosted stock prices. Through yesterday, the S&P 500 has gained 12 percent since Aug. 27 when Fed Chairman Ben S. Bernanke said the central bank “will do all it can” to sustain the recovery.

Economic growth in the 2.5 percent to 2.8 percent range is consistent with keeping the jobless rate stable, according to Fed’s policy makers’ latest forecasts. The economy grew at a 2 percent pace in the third quarter after 1.7 percent in the prior three months.

Republicans’ Victory

Republicans yesterday gained at least 60 seats in the House of Representatives, capitalizing on concern about government spending and delivering a rebuke to President Barack Obama’s domestic agenda. Democrats retained control of the Senate.

The results will bolster Republican efforts to extend Bush-era tax cuts for those earning more than $250,000 and to defeat Obama’s proposals to increase taxes on companies’ overseas profits.

Construction is among the industries that have weighed on the ISM non-manufacturing survey as home sales are hovering near record lows.

“Housing fundamentals remain weak as we enter the final quarter of the year, when construction activity is normally low,” Daniel Fulton, chief executive officer of Weyerhaeuser Co., said on an Oct. 29 teleconference on the wood-products company’s third-quarter earnings. “This is a result of the lack of job recovery, low consumer confidence, stagnant home prices,” elevated inventory and foreclosures.