Service Industries in U.S. Grow at Fastest Pace in a Year

Service industries in the U.S. expanded in February at the fastest pace in a year as a recovery in housing rippled through the economy.

The Institute for Supply Management’s non-manufacturing index unexpectedly increased to 56 last month from 55.2 in January, the Tempe, Arizona-based group said today. Readings above 50 signal expansion in the industries comprising 90 percent of the economy. The median Bloomberg forecast called for the measure to ease to 55.

The fastest pace of new-home sales since 2008 is benefiting builders such as Hovnanian Enterprises Inc., real-estate agents and mortgage-finance companies. Accelerating service orders, along with a pickup in manufacturing reported last week, show the economy is withstanding budget battles in Washington.

“The service sector is gaining some momentum,” said Tom Simons, an economist at Jefferies LLC in New York, who correctly forecast the February figure. “Housing is doing fairly well, so that’s having a positive impact. The labor market has been broadly improving. For services, there are some knock-on effects from gains in manufacturing as well.”

Stocks rallied, sending the Dow Jones Industrial Average to a record and erasing losses from the financial crisis as China vowed to maintain its growth target and investors bet central banks will continue monetary stimulus. The Dow advanced 0.9 percent to 14,253.77 at the close in New York.

Estimates of 73 economists for the non-manufacturing gauge ranged from 50 to 56.3. The gauge of industries ranging from utilities and retail to health care, housing and finance, has averaged 53.6 since the recession ended in June 2009.

Factory Expansion

The figures follow data last week that showed the fastest pace of manufacturing since June 2011. The ISM’s factory index advanced to 54.2 in February from 53.1 a month earlier as orders climbed the most in almost two years.

Services in the U.K. also unexpectedly accelerated last month as demand strengthened. A gauge of activity increased to 51.8 from 51.5 in January, Markit Economics and the Chartered Institute of Purchasing and Supply said today in London.

The U.S. and U.K. figures contrast with tempered services growth in the world’s second-biggest economy. China’s services expanded in February at the slowest pace since September as a gauge of new orders declined.

In the U.S., 13 non-manufacturing industries, including real estate, transportation, retail trade and finance, reported growth in February, while five said business contracted.

New Orders

The ISM’s measure of new orders increased to 58.2 from 54.4, while the gauge of business activity advanced to 56.9 from 56.4. The group’s employment gauge was little changed at 57.2 after reaching an almost seven-year high of 57.5 the prior month.

The pickup shows that demand is holding up in the face of 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 for someone who earns $50,000 a year by about $83 a month.

At the same time, the economy will be tested this year by $85 billion in across-the-board budget cuts, known as sequestration, that began last week because Congress couldn’t compromise on deficit reduction.

‘More Activity’

“Even though the fiscal picture is still unclear at this point in time, there seems to be, from what’s driven by these various industries that make up this sector, a bit more activity,” Anthony Nieves, chairman of ISM’s non-manufacturing survey committee, said today on a call with reporters.

Markets have also looked past the impending government spending cuts. The Standard & Poor’s 500 Index advanced 6.5 percent this year through last week, better than the 4.1 percent gain for the MSCI All Country World Index. The U.S. Dollar Index, which tracks the currency against six of America’s biggest trading partners, was the highest since August.

Construction and real estate were among those non-manufacturing industries that reported growth in February. Low borrowing costs and stronger property values are supporting demand in the housing market.

Purchases of new homes, logged when contracts are signed, jumped in January to a 437,000 annual pace, the strongest since 2008, the Commerce Department reported. Sales of previously-owned houses climbed to a 4.92 million annual rate in January, and the number of available properties slumped to 1.74 million, the lowest level since 1999, the National Association of Realtors said.

Hovnanian Outlook

Homebuilder Hovnanian Enterprises of Red Bank, New Jersey, is projecting further gains for the industry this year.

“Population is up, sentiment about buying homes is up, households are unbundling, creating demand for housing,” Larry Sorsby, executive vice president and chief financial officer, said at a Feb. 26 conference. “Consumer confidence is rising, rents are rising. So people are more anxious to buy today than they were a year ago and we think that trend is going to continue.”

Sustained hiring is also supporting growth. Employers added 157,000 workers in January after a revised 196,000 rise the prior month and a 247,000 surge in November, according to Labor Department data. Revisions added a total of 127,000 jobs in the last two months of 2012. About 160,000 jobs were created in February, according to the Bloomberg survey median before a March 8 report.

Federal Reserve Chairman Ben S. Bernanke has said that while the expansion is gaining traction, the need for a stronger economic recovery outweighs the potential costs in financial markets of continuing unprecedented monetary easing.

“Available information suggests that economic growth has picked up again this year,” Bernanke said last week in testimony to the Senate Banking Committee in Washington.

Still, Bernanke cited an estimate from the nonpartisan Congressional Budget Office that the cuts in the rate of growth in federal spending will cause a 0.6 percentage-point reduction in growth this year.

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