March 26 (Bloomberg) -- Service producers are taking over from manufacturing as the driver of the almost three-year-old U.S. expansion.
The end of the recession in June 2009 triggered the biggest surge in production in a decade, propelled by rising demand from overseas and the need to replenish inventories and upgrade equipment. That is now giving way to increasing sales at places like restaurants, transportation companies and temporary-help agencies, leading to gains in employment that have bolstered the world’s largest economy.
“The pickup in services provides a broader base for the economic expansion and actually is a source of more sustainable growth,” said Richard DeKaser, deputy chief economist at Parthenon Group LLC in Boston and the third-best forecaster of gross domestic product in the two years to February, according to data compiled by Bloomberg News. “We’re going to continue to see job gains close to the magnitude we’ve seen in recent months, with services likely contributing a large share.”
The economy has created more than 200,000 jobs in each of the past three months, and the increase in payrolls since September has been the biggest since 2006, according to figures from the Labor Department. The Institute for Supply Management’s services index, which includes mining and construction companies and tracks about 88 percent of the economy, has exceeded its factory gauge in seven of the last eight months, opening the biggest advantage in three years in February.
Bernanke on Jobs
Federal Reserve Chairman Ben S. Bernanke said today that while he’s encouraged by progress in the labor market, “continued accommodative policies” are necessary to sustain demand that will further boost job growth.
“A wide range of indicators suggests that the job market has been improving, which is a welcome development indeed,” Bernanke said to the National Association for Business Economics. “Still, conditions remain far from normal, as shown, for example, by the high level of long-term unemployment and the fact that jobs and hours worked remain well below pre-crisis peaks, even without adjusting for growth in the labor force.”
A report from the National Association of Realtors today showed the number of Americans signing contracts to buy previously owned homes held in February near an almost two-year high, a sign that the real estate market may be stabilizing.
The index of pending home purchases fell 0.5 percent to 96.5 after a 2 percent increase the prior month. January’s reading of 97 was the highest since April 2010. The median forecast of 41 economists surveyed by Bloomberg News called for a 1 percent rise.
German Business Confidence
In Germany today, a gauge of business confidence unexpectedly rose to an eight-month high in March, suggesting Europe’s largest economy will return to growth even as the sovereign-debt crisis curbs euro-area demand for its exports.
U.S. stocks rose after Bernanke’s comments and as investors speculated the European Union will increase the size of its bailout fund. The Standard & Poor’s 500 Index climbed 1 percent to 1,411.20 at 10:28 a.m. in New York.
Manufacturing in the U.S. “is doing yeoman’s work in keeping things growing moderately,” said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania. “But by itself, it cannot shift the economy into high gear. What we are starting to see, and what we absolutely need to see, is the spending on services side that can drive the economy forward to some pretty solid growth.”
Retail sales climbed 10.3 percent in February from the same month in 2011 before adjusting for seasonal variations, second to the 10.6 percent gain in March 2010 as the biggest in a decade, data from the Commerce Department showed March 13. Auto dealers, furniture stores, home and garden centers, and restaurants were among merchants seeing a pickup in demand in excess of 10 percent over the past year.
By contrast, factory production was up 5.1 percent last month from a year earlier, cooling from a decade high 8.1 percent gain in the year ended June 2010, according to figures from the Fed. Reports from regional Fed banks in New York and Philadelphia showed gains in orders slowed in March.
Staples Inc., the Framingham, Massachusetts-based office-supply chain, is among service providers seeing a pickup.
“Things are starting to feel a little better, especially in North America,” Ronald L. Sargent, Staples’ chief executive officer, said in a Feb. 29 conference call. “The economy is slowly starting to turn,” he said, “and small business seems to be leading the way.”
Confidence among small businesses rose in February to the highest level in a year as profits improved, a survey by the National Association of Independent Business showed March 13. The group’s earnings gauge climbed to the highest level since before the recession began, and more owners said they are boosting wages to attract workers as sales increase.
Spending on “the little luxuries of life,” like dining out, “is really good because it shows growing confidence,” said Naroff. “That’s what we need to see within the economy for it to pick up steam.”
New cars are on Americans’ shopping lists, indicating that auto production will be one area of manufacturing that will hold up. Cars last month sold at the fastest pace in four years, led by Chrysler Group LLC and a surprise gain from General Motors Co.
Growing car purchases can also prove to be a boom to service industries. Jacksonville, Florida-based CSX Corp., the biggest railroad in the eastern U.S., said March 15 that its auto volume has advanced about 20 percent this year through March 9.
Auto production “is critical not just for our automotive business, but also for our steel business, our chemical business and our intermodal business,” Fredrik Eliasson, CSX’s chief financial officer, said at a JPMorgan Chase & Co. conference in New York.
The pickup in services brightens the outlook for hiring because those industries rely more on workers than machines to satisfy demand, said Parthenon Group’s DeKaser.
“In services you don’t have the kind of large productivity gains that we enjoy in manufacturing,” he said. “Manufacturing output can more readily be met through productivity gains, whereas the services sector requires more workers.”
As the rebound in manufacturing gave the economy time to heal, a more stable construction industry may now be giving factories a lift. Excluding the period in mid-2010 when housing got a boost from the Obama administration’s first-time buyer tax credit, output of building materials over the past three months has climbed by the most since 1994, the Fed’s industrial production report showed last week.
“The service sector is snapping back” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. The economic expansion “is broadening out, which tells me the gains are more likely to be sustained than if they were led by just one area of the economy.”
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