Service Industries in U.S. Expand by Most in Year: Economy

Services Gauge in U.S. Unexpectedly Climbs to One-Year High
Service industries in the U.S. unexpectedly expanded in February at the fastest pace in a year. Photographer: Noah Berger/Bloomberg

Service industries in the U.S. unexpectedly grew in February at the fastest pace in a year, showing further strength for the biggest part of economy.

The Institute for Supply Management’s non-manufacturing index climbed to 57.3 from 56.8 in January, the Tempe, Arizona-based group’s data showed today. Readings above 50 signal expansion, and the median forecast of economists surveyed by Bloomberg News was 56.

A sustained pickup in the industries that make up almost 90 percent of the economy would bolster the expansion, creating employment opportunities that will help sustain household demand. At the same, rising gasoline prices represent a risk to a recovery that Federal Reserve Chairman Ben S. Bernanke last week said was “uneven and modest.”

“The momentum that we’ve been generating in the economy is starting to broaden,” said Robert Dye, chief economist at Comerica Inc. in Dallas. “As we get stronger job growth, we’ll see more lift to the economy in the second half of the year.”

Another report today showed orders to U.S. factories decreased in January for the first time in three months. Bookings fell 1 percent after a revised 1.4 percent gain in December that was larger than previously estimated, according to figures from the Commerce Department. The median of 61 economists’ projections in a Bloomberg survey called for a 1.5 percent decline.

Stocks fell, giving the Standard & Poor’s 500 Index its biggest two-day drop since January, as China reduced its economic growth target. The S&P 500 declined 0.4 percent to 1,364.33 at the close in New York, after a 0.3 percent fall on March 2.

Orders and Employment

The ISM non-manufacturing survey’s measure of new orders increased to 61.2, a one-year high, from 59.4. A gauge of business activity was the strongest in 12 months. The employment gauge fell to 55.7 from 57.4, the best back-to-back readings since early 2006.

Estimates of the 66 economists in the Bloomberg survey for the ISM services figure ranged from 54 to 59. The report covers industries ranging from utilities and construction to retailing and finance. A March 1 report by the group showed manufacturing expanded in February at the slowest pace in three months as orders and employment cooled.

Elsewhere today, euro-area services output shrank more than forecast in February, led by Italy and Spain, as the region’s economy struggled to rebound after contracting in the fourth quarter. U.K. services growth also cooled last month, according to a separate report.

In Asia, India’s services industries expanded at a slower pace in February, according to an index released today by HSBC Holdings Plc and Markit.

‘Moderate Growth’

United Parcel Service Inc. is among American service companies seeing a pickup in demand.

“For 2012, what we’re looking for is continued stable but moderate growth in the U.S.,” Kurt Kuehn, chief financial officer at UPS, said at a Feb. 15 transportation services conference. “We think the U.S. economy is on the mend. We think the downside risk in the U.S. is lowered.”

Still, higher fuel costs are straining household budgets, restraining purchases of other goods. Gasoline prices climbed to $3.77 a gallon on March 4, up from a 10-month low of $3.21 on Dec. 20, according to AAA, the nation’s largest motoring organization.

Personal spending after adjusting for inflation failed to grow in the three months ended in January, the Commerce Department said last week.

Rising fuel prices are a concern for businesses as well. Today’s ISM report showed a gauge of prices paid climbed to 68.4 from 63.5. Fourteen non-manufacturing industries reported higher prices paid, while two said costs were lower.

“There’s still a lot of cost pressure out there,” Anthony Nieves, chairman of the ISM survey, said on a conference call from Beverly Hills, California. Prices are rising “across the board” through the economy, he said.

Unemployment Rate

At the same time, an improving job market has boosted consumer confidence and may spur spending. The unemployment rate in February held at a two-year low of 8.3 percent, and the economy generated 210,000 jobs, according to economists’ estimates before the March 9 jobs report from the Labor Department. It would mark the third straight month of payroll gains in excess of 200,000.

The economy grew at a 3 percent annual pace in the fourth quarter after a 1.8 percent gain in the prior three months, the Commerce Department reported Feb. 29. The growth rate excluding a jump in inventories was 1.1 percent. Consumer spending rose at a 2.1 percent pace last quarter.

“The recovery of the U.S. economy continues, but the pace of expansion has been uneven and modest by historical standards,” Bernanke told lawmakers during his semiannual testimony to Congress on Feb. 29. “The job gains in recent months have been relatively widespread across industries,” he said. “However, the fundamentals that support spending continue to be weak.”


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