Services Growth Cooled Before U.S. Federal Shutdown: Economy

Service industries expanded in September at a slower pace than forecast as more corporate purchasing managers grew apprehensive about the U.S. economy leading up to the government shutdown.

The Institute for Supply Management’s non-manufacturing index dropped to a three-month low of 54.4 from the prior month’s 58.6, the Tempe, Arizona-based group said today. While readings above 50 indicate expansion, the September figure was below the lowest forecast in a Bloomberg survey of economists. Another report showed fewer Americans than projected filed applications for unemployment insurance last week.

The September decline left the services measure close to its 54.7 average since the end of 2011, a period that corresponds with economic growth of around 2 percent. Corporate plans to expand are at risk of being put on hold amid budget gridlock in Washington that poses a risk to the expansion.

“We’re still seeing positive growth, it’s just not suggesting that there’s underlying momentum in the pipeline to propel us beyond the 2 percent growth range,” said Lindsey Piegza, chief economist at Sterne Agee & Lynch Inc. in Chicago, whose services index projection of 55 was among the lowest in the Bloomberg survey. “Businesses are very hesitant to invest in additional employees.”

Stocks Drop

Stocks fell for a second day on the drop in the services index and on growing concern that the political impasse will damage the economy. The Standard & Poor’s 500 Index decreased 0.9 percent, the biggest drop in a month, to 1,678.66 at the close in New York.

The Labor Department’s report on applications for unemployment benefits showed employers were maintaining staff counts in the days leading up to the government shutdown. Jobless claims rose by 1,000 to 308,000 in the week ended Sept. 28. The median forecast of 50 economists surveyed by Bloomberg called for a rise to 315,000.

The most prominent data report issued by the government -- the employment figures -- won’t be issued tomorrow as initially scheduled because of the shutdown. An alternative date for the September figures hasn’t been rescheduled, the department said in a statement.

Another report today showed consumer confidence retreated for the first time in four weeks as Americans’ view of the economy deteriorated to the lowest level since May. The Bloomberg Consumer Comfort Index fell to minus 29.4 in the week ended Sept. 29 from minus 28.1.

Economy Views

A measure of attitudes about the economy slumped as lawmakers failed to resolve their differences over the nation’s budget, culminating this week in the first partial shutdown of the government in 17 years.

Service industries in other parts of the world are showing signs of improvement. In the U.K., they expanded in September, capping the best quarter for the industries in 16 years. Euro-area services grew more than initially estimated and a Chinese gauge rose to a six-month high, separate reports showed.

The median estimate in a Bloomberg survey of 75 economists for the ISM non-manufacturing index was 57. While the drop was the biggest since November 2008, the August reading was the highest in at least five years. The figure includes industries that range from utilities and retail to health care, housing and finance and make up about 90 percent of the economy.

“There’s still pretty good indication that there’s still growth going on,” Anthony Nieves, chairman of the survey, said in a call with reporters following the release.

Business Activity

The decline in September was due to slumps in measures of business activity and employment. Some 17 percent of purchasing managers reported a slowdown in business, the most in three months.

The ISM’s measure of new orders fell to 59.6 in September, matching the second-highest level since February 2011, from 60.5 in August.

The ISM’s manufacturing index, released earlier this week, unexpectedly rose to 56.2, the strongest since April 2011, from 55.7 a month earlier.

“With manufacturing continuing on the strength of this upward movement, it may very well pull services along,” Nieves said.

An increase this year in homebuilding has boosted service providers such as home-improvement retailers, furniture chains and real estate companies. Producers of furniture, appliances and building materials have also benefited.

Borrowing Costs

Further progress depends in part on the outlook for borrowing costs. The rate on 30-year mortgage rates averaged 4.32 percent in the week ended Sept. 26, the lowest in two months. It reached a two-year high of 4.58 percent in the week ended Aug. 22.

Car sales have been another bright spot in the economy. All four General Motors Co. brands posted double-digit retail sales increases in the third quarter, Kurt McNeil, vice president of U.S. sales, said on an Oct. 1 sales and revenue call.

“The recent drop in jobless claims signals that we should see further acceleration in payrolls,” McNeil said. “Add to that an accommodative monetary policy, a recovery in housing markets, low energy prices, and rising household wealth and it’s clear that we should be in good shape going forward.”

At the same time, an extended shutdown of the government poses a risk. The U.S. government furloughed about 800,000 employees and shuttered government offices, national parks and museums after Congress failed to pass a continuing resolution to fund federal operations in the near-term.

Ford, GM

“Any type of disruption in government operations would adversely affect government spending, business and consumer confidence, and financial markets,” Jenny Lin, a senior economist at Ford Motor Co., told reporters and analysts.

On this, GM and Ford agreed.

“If this thing drags out a couple of weeks, it starts to have more impact on customer sentiment and it starts to have a bigger impact on business,” said GM’s McNeil.

A partial federal shutdown will cost the U.S. at least $300 million a day in lost economic output at the start, according to Lexington, Massachusetts-based IHS Inc. While that’s a fraction of the country’s $15.7 trillion economy, the effects probably will grow over time as consumers and businesses defer purchases and expansion plans.

What’s more, Congress has yet to raise the nation’s $16.7 trillion debt ceiling. The Treasury projects that the U.S. will exhaust its measures to stay under the limit no later than Oct. 17.

“Let’s assume that the government shutdown is brief and we sail through the debt ceiling, then I think it matters not much at all,” said Guy Berger, an economist at RBS Securities Inc. in Stamford, Connecticut. “A more realistic case is that the shutdown is a little longer.”

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