Service Industries Sustain Gain as U.S. Hiring Climbs

Service industries in the U.S. expanded in January at about the same pace as the prior month, driving demand for more workers and helping cushion the economy in the face of the Washington budget battle.

The Institute for Supply Management’s non-manufacturing index slipped to 55.2 from a 10-month high of 55.7 in December, the Tempe, Arizona-based group said today. Readings above 50 signal expansion. The group’s employment gauge was the strongest in seven years.

More jobs improve the odds that the recent pickup in consumer spending will be sustained as households deal with the two percentage-point increase in the payroll tax. The gain, coming just as lawmakers try to fashion a budget compromise, indicates companies such as MasterCard Inc. and PulteGroup Inc. will keep benefiting from growing demand.

“We are starting to see more evidence of an improving labor market,” said Kevin Cummins, an economist at UBS Securities LLC in Stamford, Connecticut, who projected a reading of 55. “So far, it doesn’t seem the consumer has fallen off a cliff.”

Stocks advanced as more companies posted improving earnings. The Standard & Poor’s 500 Index climbed 1 percent to 1,511.29 at the close in New York.

Elsewhere, the U.K. services industry unexpectedly grew in January at the fastest pace in four months, indicating the economy there may avoid an unprecedented triple-dip recession. A gauge of activity surged to 51.5, the highest since September, from 48.9 in December, Markit Economics and the Chartered Institute of Purchasing and Supply said in London today.

China Services

Chinese service industries may also be on the mend. They expanded last month at the fastest pace since August as gains in retailing and construction helped drive a recovery. The non-manufacturing Purchasing Managers’ Index was 56.2 in January after 56.1 a month earlier, the Beijing-based National Bureau of Statistics and China Federation of Logistics & Purchasing said in a statement Feb. 3.

The median forecast of 76 economists in a Bloomberg survey called for a reading of 55 in the U.S. services gauge. Estimates ranged from 53 to 57.5. The index, which includes industries from utilities and retail to health care, housing and finance, has averaged 53.5 since the recession ended in June 2009.

The ISM’s employment gauge jumped to 57.5, the highest since February 2006, from 55.3 in the prior month, today’s report showed. The measure of new orders decreased to the lowest since April 2012.

A rebound in housing is a reason Federal Reserve Governor Elizabeth Duke said she’s upbeat about the outlook for the economy in the wake of a fourth-quarter slowdown.

Duke ‘Optimistic’

“I’m actually on the optimistic side,” Duke said today in response to audience questions during a speech in Duluth, Georgia. “If you look at the underlying thesis, the growth in consumer spending and some of the business growth, I think there is some momentum building, particularly in the area of housing.”

Duke backed the Federal Open Market Committee decision last week to continue purchasing securities at the rate of $85 billion a month. The Fed said economic growth “paused in recent months, in large part because of weather-related disruptions and other transitory factors,” while “the housing sector has shown further improvement.”

Spending on all construction projects rose 0.9 percent in December to an $885 billion annual rate, the highest since August 2009, Commerce Department figures showed on Feb. 1. Homebuilding outlays increased 2.2 percent to the highest level since November 2008.

PulteGroup View

The gains have generated more optimism among companies such as Bloomfield Hills, Michigan-based PulteGroup, the largest homebuilder by market value.

“The combination of incredibly low mortgage rates, continued increases in rental rates and especially rising home prices, and very low -- and likely to stay low -- inventory levels for housing lead us to believe that 2013 will be a better year for U.S. housing than 2012,” Chief Executive Officer Richard Dugas said on a Jan. 31 earnings call.

Real-estate agents are also benefiting. Figures from the National Association of Realtors show 4.65 million previously owned homes were sold in 2012, up 9.2 percent from the previous year and the biggest increase since 2004.

A rebound in manufacturing may also ripple through the rest of the economy. The Institute for Supply Management’s factory gauge advanced to a nine-month high of 53.1 in January, the group reported last week.

Employment Growth

A Labor Department report last week showed the job market is improving. Employers added 157,000 workers in January after a revised 196,000 rise the prior month and a 247,000 surge in November. Revisions added a total of 127,000 jobs in the last two months of 2012.

A hurdle for consumers is higher payroll taxes. As part of its budget agreement on Jan. 1, Congress agreed to let the tax, used to pay for Social Security benefits, return to its 2010 level of 6.2 percent from 4.2 percent. That reduces the paycheck by about $83 a month for someone who earns $50,000.

Republican leaders in the House of Representatives are considering a stopgap measure to fund the government for the rest of the fiscal year that could reduce spending below $1 trillion, Representative James Lankford, an Oklahoma Republican, said yesterday in an interview.

They are running through all possible scenarios as two fiscal deadlines near. On March 1, automatic spending cuts stemming from an impasse between the White House and Congress over deficit reduction take effect, while the continuing resolution funding U.S. government operations expires on March 27.

Some Cautious

MasterCard, the second-biggest U.S. payments network, posted fourth-quarter profit that beat analysts’ estimates as customers shopped more. Nonetheless, the Purchase, New York-based business is cautious about the first-quarter outlook.

“Any optimism that we have about the economy, however, will be tempered until we see what happens to consumer confidence and spending” as federal budget negotiations continue, Chief Executive Officer Ajay Banga said on a Jan. 31 conference call with analysts.

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