Slowing Service Industries Point to Cooler U.S. Growth

Service industries expanded in March at the slowest pace in seven months and companies added fewer workers than forecast, indicating the U.S. economy is starting to cool.

The Institute for Supply Management said its non-manufacturing gauge declined to 54.4 from a one-year high of 56. The index was in line with its average over the past year. Private employment rose 158,000 last month, the smallest gain since October, according to the ADP Research Institute.

Slower growth in services, along with a report earlier this week that showed a decrease in the pace of manufacturing, underscores the risk to the economy from across-the-board cuts in the federal budget. At the same time, income gains and low borrowing costs may provide a buffer for retailers such as Macy’s Inc., while a rebounding housing market benefits Realtors, builders and lenders.

“Growth is set to slow somewhat in the second quarter after a spurt of activity in the first quarter,” said Ryan Wang, an economist at HSBC Securities USA Inc. in New York, who projected a March ISM reading of 54.5. “Employers are cautiously optimistic but also closely monitoring new orders as they make hiring decisions.”

The Standard & Poor’s 500 Index retreated from a record and Treasury yields declined after the report. The S&P 500 dropped 1.1 percent to 1,553.69 at the close in New York. The yield on the benchmark 10-year Treasury note declined to 1.81 percent from 1.86 percent late yesterday.

The median forecast of 73 economists in a Bloomberg survey called for a drop in the Tempe, Arizona-based group’s index to 55.5. A reading above 50 in the gauge indicates expansion in the sector that accounts for almost 90 percent of the economy.

Industries Expanding

Fifteen non-manufacturing industries, including real estate, construction and finance, reported growth in March, while three signaled contraction.

“Where we are is still a healthy level” for the index, Anthony Nieves, chairman of ISM’s non-manufacturing survey committee, said today on a call with reporters. “I’d rather see slow, incremental growth that is sustainable.”

Merchants projecting the pace of sales will be sustained include Macy’s, the second-largest U.S. department-store chain. The Cincinnati, Ohio-based retailer said sales at stores open at least a year will rise 3.5 percent this year, after growing 3.7 percent in 2012.

“We look at the momentum we have coming into the year and we feel quite confident,” Karen Hoguet, chief financial officer, said at a March 14 conference. “That doesn’t mean that we’re not cognizant of all that’s going on in Washington and what’s gone on with the payroll tax.”

Orders, Employment

The ISM non-manufacturing survey’s measure of new orders declined to 54.6 from 58.2. The employment gauge fell to 53.3 in March from 57.2, the biggest decrease in four years.

The Roseland, New Jersey-based ADP Research Institute’s report showed March employment eased after a revised 237,000 gain the prior month. The median forecast of 39 economists surveyed by Bloomberg called for a 200,000 advance.

“The job market continues to improve, but in fits and starts,” Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, said in a statement. Moody’s produces the figures with ADP.

Companies employing more than 499 workers added 47,000 jobs. Medium-sized businesses, with 50 to 499 employees, took on 37,000 and small companies increased payrolls by 74,000, the report showed.

Payroll Estimates

Some Wall Street firms reduced their estimates of payrolls at both private employers and government agencies ahead of the Labor Department’s figures in two days. Economists at Deutsche Bank Securities LLC and at Credit Suisse cut their estimates for March to 160,000 from 200,000. The median projection in the Bloomberg survey calls for a 195,000 gain in March payrolls.

An ISM factory survey on April 1 signaled that manufacturing, which accounts for about 12 percent of the economy, took a breather in March as well, as businesses assessed the impact of the automatic federal government spending cuts, or sequestration, which were triggered as lawmakers failed to reach a compromise on ways to reduce the nation’s debt. The manufacturing index fell to 51.3 from an almost two-year high of 54.2 in February.

For consumers, progress in the labor market is softening the blow from a two percentage-point rise in the payroll tax that went into effect at the start of 2013. Household spending, which makes up about 70 percent of the economy, climbed in February by the most in five months.

A pickup in purchases and business investment probably allowed the economy to expand at a 3.8 percent annual rate in the first quarter, according to economists at JPMorgan Chase & Co. They project growth to cool to a 1.5 percent pace in the second quarter.

Interest Rates

Historically low interest rates are giving housing a leg up. Reports for February showed sales of previously owned properties climbed to the highest level in more than three years, and purchases of new houses capped the best back-to-back months in more than four years.

The average rate on a 30-year fixed mortgage was 3.57 percent last week, according to data from Freddie Mac. Borrowing costs reached a record low of 3.31 percent in November.

Auto dealerships may also benefit as demand rises. Motor vehicle sales averaged a 15.26 million annual rate in the first quarter, the best quarterly average in five years, after 14.99 million in the final three months of 2012.

“The economic picture looks pretty similar to the last couple of months, which helps to explain why the industry has stayed in a relatively healthy range,” Kurt McNeil, vice president of U.S. sales operations for General Motors Co., said on an April 2 conference call. “ The housing market continues to recover, business spending has picked up, and pent-up demand for vehicles is offsetting any drag from tax or federal spending issues.”

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