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U.S. Economy: Services Expand by Most Since 2006

Service Industries in U.S. Expanded Fastest Pace Since 2006
Gains at FedEx Corp. and Carnival Corp. show the expansion is extending beyond manufacturers, which may give more employers the confidence to increase payrolls. Photographer: Jin Lee/Bloomberg

Jan. 5 (Bloomberg) -- Service industries expanded in December at the fastest pace since May 2006, showing the U.S. economic recovery is picking up and broadening beyond manufacturing.

The Institute for Supply Management’s non-factory index, which covers about 90 percent of the economy, rose to 57.1, exceeding the median forecast of economists surveyed by Bloomberg News, from 55 in November. A reading greater than 50 signals growth. Another report today showed hiring accelerated.

Improving demand at FedEx Corp. and Carnival Corp. shows the expansion is extending to areas like retailing and recreation, putting the rebound from the worst recession since the 1930s on firmer footing. The gains may prompt more employers to increase payrolls, one of the missing ingredients that has concerned Federal Reserve policy makers.

“We’re coming into 2011 with some good momentum,” said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, who projected the ISM index would climb to 57. “We’re going to be entering a better business climate.”

The median forecast of 67 economists surveyed by Bloomberg News projected the index would rise to 55.7. Estimates ranged from 54 to 58.5.

Stocks climbed as the reports bolstered optimism the economy is strengthening. The Standard & Poor’s 500 Index rose 0.5 percent to a two-year high of 1,276.56 at the 4 p.m. close in New York. Treasury securities fell, pushing the yield on the benchmark 10-year note up to 3.47 percent at 5:06 p.m. from 3.33 percent late yesterday.

Payroll Count

A report today from ADP Employer Services showed companies boosted payrolls in December by the most since records began in 2001. Employment increased by 297,000, almost three times the 100,000 median estimate of economists surveyed.

Employers last month also announced plans to cut 32,004 jobs, the fewest since June 2000, according to data today from Challenger, Gray & Christmas Inc. The Chicago-based outplacement company said firings were down 29 percent from December 2009.

The Labor Department may report Jan. 7 that private payrolls increased by 162,000 in December, three times the previous month’s gain, the survey median showed. Total payrolls, which include government agencies, may rise by 150,000 after a 39,000 gain.

The ISM non-manufacturing measures of new orders and business activity increased to the highest levels since August 2005. The group’s employment gauge fell to a three-month low, damping some of the optimism raised by the ADP report.

More ‘Sustainable’

“I’ve always felt that slow incremental growth would be more sustainable over the long haul instead of upward spikes,” Anthony Nieves, chairman of the ISM services survey, said on a conference call with reporters. “We’ve always felt that employment would be the dark horse in this.” While employment slowed, “it’s still reflecting growth, which is positive.”

The services survey covers industries that range from utilities and merchants to health care, housing, finance and transportation. The group’s factory index, released Jan. 3, rose to 57, the highest in seven months.

The services index averaged 56.1 in the five years to December 2007, when the last recession began. It’s averaged 51.7 since the current recovery started in June 2009 through November, trailing the 55.2 reading on the group’s factory measure during the same period.

Companies are gaining confidence. Miami-based Carnival, the world’s biggest cruise-line operator, forecast fiscal 2011 earnings will increase as ticket prices and demand strengthen.

Demand ‘Strong’

“Overall demand for cruises continues to be strong, clearly evidencing that, with the economic indicators turning positive, that North America and European consumer confidence is returning,” David Bernstein, chief financial officer, said on a Dec. 21 teleconference with analysts.

Memphis, Tennessee-based FedEx last month raised its profit forecast for fiscal 2011.

“We’re now more bullish about the remainder of the year,” Chief Executive Officer Fred Smith said in a Dec. 16 call with analysts. “Overall, the global economic picture is increasingly more positive as recovery continues at a steady pace.”

The recovery has so far been led by manufacturing as exports climbed, business investment picked up and inventories were replenished.

Spending Improves

While the housing industry remains a weak link, consumer spending, which accounts for 70 percent of the economy, has been accelerating, providing a boost to services industries.

Fed policy makers last month reiterated that progress toward cutting unemployment and preventing inflation from slowing too much remained “disappointingly slow,” according to minutes of their Dec. 14 meeting released yesterday. The officials affirmed their plan to buy $600 billion in Treasury securities through June, aimed at bolstering the economy and reducing joblessness.

President Barack Obama pledged on Jan. 1 to work with Republican lawmakers to strengthen the economy and build on economic gains that show the recovery is “gaining traction.”

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

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

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