Services in U.S. Expand at the Fastest Pace in 10 Months

Service industries in the U.S. expanded in December at the fastest pace in 10 months, helping spur the world’s largest economy at the end of 2012.

The Institute for Supply Management’s non-manufacturing index climbed to 56.1 last month from 54.7 in November, the Tempe, Arizona-based group said today. Economists projected the gauge would drop to 54.1, according to the median estimate in a Bloomberg survey. Readings above 50 signal expansion.

A brighter holiday shopping season for retailers and an improvement in the housing market helped propel the industries that make up almost 90 percent of the U.S. economy. Faster services growth may depend on how quickly more Americans can find the jobs needed to boost incomes and spur spending, helping assuage higher taxes this year.

“The economy is going to do better in 2013,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, whose ISM forecast of 56 was the highest in the Bloomberg survey. “The service sector seems to be fine. Housing is going to continue to help. The labor market continues to improve.”

Stocks maintained gains after the figures, with the Standard & Poor’s 500 Index poised for its biggest weekly rally in 13 months. The S&P 500 climbed 0.1 percent to 1,461.33 at 10:38 a.m. in New York.

Estimates in the Bloomberg survey of 66 economists ranged from 52 to 56. The index, which includes industries ranging from utilities and retailing to health care, housing and finance, has averaged 53.6 since the recession ended in June 2009.

Construction, Retailing

Thirteen non-manufacturing industries, including construction, retailers and finance, reported growth in December, while five said business contracted.

Another report today showed employers added workers in December at about the same pace as the prior month, while the unemployment rate matched a four-year low. Payrolls climbed by 155,000 workers last month after a revised 161,000 advance that was more than initially estimated, according to the Labor Department.

The jobless rate held at 7.8 percent after the November figure was revised up from a previously reported 7.7 percent.

The ISM’s employment gauge rose to 56.3, the highest since March, from 50.3 in the prior month, today’s report showed. The measure of new orders increased to 59.3, the highest since February, from 58.1. The gauge of business activity fell to 60.3 from 61.2.

Factory Gauge

The ISM’s manufacturing index, released Jan. 2, showed the industry grew last month, one indication the economic expansion will be sustained in 2013. The factory gauge climbed to 50.7 from a three year-low of 49.5 in November as orders, employment and exports grew.

While the factory sector had stumbled in prior months as concerns over higher taxes and government budget cuts caused businesses to reduce investment, the services industry continued to grow. Consumer spending and rising housing activity helped keep the economy expanding during that period.

Macy’s Inc. and Gap Inc. yesterday reported December same-store sales that topped analysts’ estimates. Demand at Macy’s, the second-biggest U.S. department-store company, rose 4.1 percent, from a year earlier exceeding the average projection of 3.7 percent from analysts surveyed by researcher Retail Metrics Inc. Gap, the largest U.S. specialty-apparel retailer, posted a 5 percent gain, topping the 3.6 percent estimate.

Housing Strength

Meanwhile, residential real estate gained momentum going into the end of 2012. Existing-home sales reached a three-year high in November. New-home sales advanced 4.4 percent to a 377,000 annual pace last month, the highest level since April 2010, the Commerce Department reported last month. Homebuilding outlays increased 0.4 percent last month to a $295.3 billion annual rate, the most since November 2008.

At the same time, higher taxes on households may suppress spending. Following the congressional budget deal earlier this week, workers will see payroll taxes rise by two percentage points, while the wealthiest Americans will also pay higher income taxes. Together, those measures are projected to reduce growth in the first quarter to 1 percent, from 3.1 percent in 2012’s third quarter, the latest data available, according to economists at JPMorgan Chase & Co. and Bank of America Corp.

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