U.S. Service Industries Unexpectedly Expand at Faster Pace

U.S. ISM Services Index Increased to 53.3
Customers place their order with a Cheesecake Factory waiter at a restaurant in Denver, Colorado. Photographer: Matthew Staver/Bloomberg

Service industries unexpectedly expanded at a faster pace in August, easing concern the biggest part of the U.S. economy was slumping.

The Institute for Supply Management’s index of non-manufacturing businesses increased to 53.3 last month from 52.7 in July. Economists forecast the gauge would drop to 51, according to the median estimate in a Bloomberg News survey. A reading above 50 signals expansion.

A pickup among the non-manufacturing industries that account for about 90 percent of the economy shows the recovery may persist amid dimming job prospects and rising pessimism about the economic outlook. Federal Reserve Chairman Ben S. Bernanke said last month that the economy will probably improve in the second half of this year.

“The service sector has been slower to show the extent of the slowdown,” said Lindsey Piegza, an economist at FTN Financial in New York. “The economy is stuck in first gear, which is better than being in reverse, but the report certainly isn’t saying that we’re moving into second gear in the second half of the year.”

Estimates for the index from 74 economists ranged from 49 to 53.5. The Tempe, Arizona-based group’s measure, which covers about 90 percent of the economy, averaged 56.1 in the five years to December 2007, when the last recession began.

Stocks fell on growing concern that Europe’s debt crisis is worsening. The Standard & Poor’s 500 Index declined 0.7 percent to 1,165.24 at the 4 p.m. close in New York. Treasuries rose, pushing down the yield on the benchmark 10-year note to 1.97 percent, after reaching a record-low 1.91 percent earlier, from 1.99 percent yesterday.

Orders Pick Up

The index of new orders in the services industry increased to 52.8 from 51.7 the prior month. A gauge of business activity fell to 55.6 from 56.1 in July. The measure of prices paid increased to 64.2 from 56.6.

The group’s employment index declined to 51.6, the lowest since September 2010, from 52.5 a month earlier.

The ISM services survey covers industries ranging from utilities and retailing to health care and finance. Today’s report follows the group’s Sept. 1 figures that showed manufacturing unexpectedly expanded in August, allaying concern the world’s largest economy is headed for another recession.

A struggling labor market and economic growth that slowed in the first half of the year have weighed on sentiment, prompting Americans to limit purchases of non-essential goods and services.

Consumer Confidence

The Conference Board’s index of consumer confidence dropped last week to the lowest level since April 2009, and the Bloomberg Consumer Comfort Index has been stuck below minus 40 since the end of February, the level associated with recessions.

Employment unexpectedly stagnated in August as employers became less sanguine about the strength of the recovery. Private payrolls, which exclude government agencies, rose 17,000 in August, the smallest gain since a decrease in February 2010. The jobless rate held at 9.1 percent, and earnings and hours worked declined, reducing the income of consumers whose spending accounts for 70 percent of the economy.

President Barack Obama has requested a joint session of Congress on Sept. 8 to unveil his proposals to promote job growth. Obama said in a letter to House Speaker John Boehner that the nation faces “unprecedented” economic challenges.

Rising prices have also hurt consumer buying power. An Aug. 29 Commerce Department report showed that the income left after taking out taxes and adjusting for inflation dropped 0.1 percent in July, the first decrease since September 2010.

“I continue to see customers who are still struggling,” Rick Dreiling, chief executive officer of Goodlettsville, Tennessee-based Dollar General Corp. said in Aug. 30 call with analysts. “The macroeconomic environment has remained difficult for consumers who continue to face high unemployment rates, high gasoline and high food costs.”


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