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Expanding Services Show Limit to Weather Impact in U.S: Economy

Gino's East Restaurant in Chicago
A waitress carries a pizza to customers at Gino's East restaurant in Chicago, Illinois. Photographer: Daniel Acker/Bloomberg

Service industries expanded more than forecast in January as the biggest part of the U.S. economy overcame the effects of snow and freezing temperatures to boost hiring by the most in more than three years.

The Institute for Supply Management’s non-manufacturing index increased to 54 from 53 in December, the Tempe, Arizona-based group said today. Readings greater than 50 signal expansion. The group’s employment gauge was the strongest since November 2010, even as a separate report showed company payrolls grew less than projected.

The pickup in services contrasts with the group’s manufacturing report this week that indicated factories expanded at a slower pace as colder-than-usual weather slowed demand and production. Retailers, management companies and professional services such as accountants were among areas that improved last month, showing the recovery is on firmer footing going into 2014 as households reduce debt burdens and wealth improves.

“This suggests ongoing momentum,” said Samuel Coffin, an economist at UBS Securities LLC in Stamford, Connecticut, and the top forecaster for the ISM services index in data compiled by Bloomberg going back two years. The divergence with the manufacturing figures shows there “is not a fundamental softening in activity.”

Companies added 175,000 workers to payrolls last month after a revised 227,000 rise in December, according to data issued today from the ADP Research Institute in Roseland, New Jersey. The median projection of 40 economists surveyed by Bloomberg called for an advance of 185,000.

Shares Drop

Stocks fell after the reports. The Standard & Poor’s 500 Index dropped 0.2 percent to 1,752.43 at 12:03 p.m. in New York.

Weather was an issue in other parts of the world. U.K. services grew in January at the slowest pace in seven months as new business cooled and wet weather soaked the country, another report today showed. Services in the euro area expanded at a slower pace than initially estimated and retail sales slid, according to other figures, underlining the fragility of the region’s recovery.

The median forecast of 78 respondents in a Bloomberg survey projected the U.S. ISM services index would rise to 53.7. Estimates ranged from 52 to 55. The index, which covers almost 90 percent of the economy, averaged 54.7 in 2013.

“We’re chugging along pretty steady,” Anthony Nieves, chairman of the ISM services survey, said in a conference call.

The U.S. ISM’s measure of new orders rose to 50.9 from 50.4. The group’s employment gauge climbed to 56.4 in January from 55.6 the month before, led by retailers, wholesalers and support services.

‘Tell-Tale Sign’

“Seeing employment up the way it is, that’s a good tell-tale sign,” ISM’s Nieves said in an interview.

A Labor Department report in two days may show payrolls rose by 184,000 workers last month after climbing by 74,000 in December, according to a Bloomberg survey median. The unemployment rate probably held at 6.7 percent, the lowest since October 2008.

The ISM services survey covers an array of industries including utilities, retailing, health care and finance.

The group’s factory index decreased to 51.3 in January, lower than the most pessimistic forecast in a Bloomberg survey of economists, from 56.5 the prior month, according to a Feb. 3 report. The slump fueled concern the world’s largest economy was losing momentum at the start of the year and contributed to a plunge in shares that day.

Trimming Stockpiles

The slowdown in manufacturing may also reflect a need to reduce inventories, said UBS’s Coffin. The rate of stockpiling showed the biggest back-to-back gains on record in the third and fourth quarters, according to data from the Commerce Department.

“Some sort of inventory swing is appearing in the manufacturing ISM,” Coffin said. That “is probably an important drag on first-quarter growth,” he said, while the services index “suggests ongoing momentum” longer term.

While some industries suffer through the cold spell, consumers continue to spend. Visa Inc., American Express Co., Discover Financial Services and MasterCard Inc. reported improved profits going into 2014 as customers used credit and debit cards to make purchases. The U.S. recovery is showing forward momentum, MasterCard Chief Executive Officer Ajay Banga said on a Jan. 31 earnings call.

“I don’t see the U.S. as being slowing in any way,” Banga said. “I see it improving.”

Car sales and housing, two areas that have provided strength to the economy, have slowed as frigid northern air has sent temperatures plummeting across most of the U.S. and snow closed businesses and schools.

Frigid Temperatures

Last month was the coldest January since 1994 in the contiguous U.S., in terms of gas-weighted heating degree days, a measure of energy demand, according to the Commodity Weather Group LLC in Bethesda, Maryland.

That prompted would-be car buyers to stay home, causing sales to drop unexpectedly and leaving dealers with unsold vehicles just as factories crank up production.

Nonetheless, General Motors Co., Ford Motor Co. and Chrysler Group LLC project U.S. sales to top 16 million this year after growing by more than 1 million annually for the last four years. Automakers sold 15.6 million cars and trucks last year, the best annual result since 2007, according to researcher Autodata Corp.

Download: ISM's Nieves Says U.S. Services Showing Resiliency

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