Labor Market Strengthens in U.S. as Services Slow: Economy

The U.S. labor market strengthened in the face of a slowdown in services, showing employers are confident the world’s largest economy can overcome higher federal taxes and budget cuts.

Claims for jobless benefits decreased by 5,000 to 343,000 in the week ended June 29, the Labor Department said today in Washington, and a private report showed companies added more workers to payrolls in June than forecast. The Institute for Supply Management said its non-manufacturing index fell to 52.2 in June from 53.7 in May. A level above 50 indicates expansion.

Other figures showed Americans were the most optimistic in five years, buoyed by rising property prices and an improving job outlook. The gain in the Bloomberg Consumer Comfort index indicates that household spending, which accounts for 70 percent of the economy, may contribute to a second-half growth pickup.

“If the labor market stays resilient, then eventually this soft patch in other indicators turns out to be temporary and the rest of the economy essentially bounces back,” said Guy Berger, an economist at RBS Securities in Stamford, Connecticut, who is the top-ranked forecaster for jobless claims based on data compiled by Bloomberg going back two years. “The assumption is that consumer confidence is going to hold up, too.”

Stocks in the U.S. rose as the labor-market data tempered concern over political turmoil in Egypt and Portugal. The Standard & Poor’s 500 Index rose 0.1 percent to 1,615.41 at 1 p.m. in New York in an early close before the Independence Day holiday. The yield on the 10-year Treasury note rose 3 basis points to 2.50 percent.

U.K. Services

Elsewhere, demand for services picked up in the U.K. An index of activity rose to 56.9 in June, the highest in more than two years, from 54.9 in May, Markit Economics and the Chartered Institute of Purchasing and Supply said today in London.

The data were in contrast to the ISM’s services index for the U.S., which fell to the lowest level since February 2010. The median forecast in a Bloomberg survey called for an increase to 54. Employment was a bright spot, with the hiring component of the services gauge climbing to 54.7, a four-month high, from 50.1 the prior month.

Roseland, New Jersey-based ADP Research Institute said separately that private payrolls climbed by 188,000 workers in June following a 134,000 gain the prior month.

Muted staff reductions reported by the Labor Department today are a sign that demand is strong enough for companies to keep staff. Greater demand in the second half of the year, buoyed by consumer purchases such as automobiles, may persuade employers to add to workers as the Federal Reserve weighs whether labor market progress is enough to warrant reducing its monthly bond-buying.

Jobs Report

The Labor Department in two days may report that total payrolls, including government employees, rose by 165,000 last month following an increase of 175,000 in May, according to the median forecast in a Bloomberg survey of economists. The jobless rate is forecast to decline to 7.5 percent from 7.6 percent.

General Motors Co. and Ford Motor Co. are among companies benefiting from strength in consumer demand. Ford’s sales of cars and light trucks gained 13 percent in June, and GM’s rose 6.5 percent, both exceeding analysts’ estimates, data showed yesterday. Industry wide, purchases climbed to a 15.9 million annualized rate, the most since November 2007, according to Ward’s Automotive Group.

Low Rates

Replacement demand and “historically low interest rates irrespective of the conversations surrounding the Fed” are fueling continued growth for the auto industry, Ken Czubay, Dearborn, Michigan-based Ford’s vice president of U.S. marketing, sales and service, said on a conference call yesterday. “The tailwinds continue to be strong” and are “pretty forceful,” he said.

Brighter job prospects are contributing to the optimism. The Bloomberg Consumer Comfort Index rose to minus 27.5 in the period ended June 30, its highest level since January 2008, from minus 28.3 a week earlier.

Higher-income Americans are seeing the biggest improvement in confidence. The index for households earning from $75,000 to $100,000 jumped to 14.8, its highest since November 2007, from 9.6 the week prior. The outlook improved for households earning more than $100,000 a year, rising to 18.9, the third-highest level since November 2007, from 14.8.

The advance in the consumer index was driven by a more optimistic view on shopping, with the buying climate index rising to minus 34.9 from minus 37.4 a week earlier as more households said the time was right to make purchases.

Personal Finances

A gauge of Americans’ views on personal finances also improved to 4.4 after holding at 3.8 for two weeks. The measure of how Americans view the current state of the economy declined for a second week to minus 51.9 from minus 51.3. A reading three weeks ago of minus 51.2 was the highest since January 2008.

Rising home prices account for some of the improved optimism. The S&P/Case-Shiller index of property values in 20 cities increased 12.1 percent in April from the same month in 2012, the biggest year-over-year gain since March 2006, a report last week showed. Purchases of new homes jumped in May to five-year high, figures from the Commerce Department showed last week.

Another Commerce Department report today also pointed to strength in consumer and business spending. The trade deficit unexpectedly jumped in May as imports rose to the second-highest level on record. The report also showed exports stagnated, reflecting slack global growth as markets from China to Europe struggle to gain momentum.

Deficit Widens

The trade gap widened by 12.1 percent to $45 billion, the biggest since November, from $40.1 billion in April, according to the Commerce Department.

“We are seeing a pickup in demand on the consumer side that’s boosting imports,” said Robert Rosener, an economist at Credit Agricole CIB in New York. “The U.S. will keep growing faster than other areas of the world.”

At the same time, the wider deficit prompted some economists to mark down their forecasts for economic growth in the second quarter. Economists at Barclays Plc reduced their tracking estimate to an annualized rate of 1 percent from 1.6 percent.

The outlook for the second half of the year is brighter as the impact dissipates from a 2 percent increase in the payroll tax and across-the-board federal budget cuts. Gross domestic product is forecast to expand at a 2.3 percent pace in the third quarter and 2.6 percent in the following three-month period, according to median estimates in a Bloomberg survey of economists.

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