Surprise Services Pickup Shows Overcoming Shutdown: Economy

Service industries in the U.S. unexpectedly accelerated in October, a sign the biggest part of the economy is overcoming the policy gridlock that partially shut down the federal government.

The Institute for Supply Management’s non-manufacturing index increased to 55.4 from 54.4 in September, the Tempe, Arizona-based group said today. Readings greater than 50 indicate growth. The median estimate in a Bloomberg survey of economists was for a drop to 54.

The report showed employment at service providers from retailers to accountants picked up last month, a sign growing sales are helping business leaders look beyond the fiscal debate in Washington. Combined with the purchasing managers’ factory gauge, the data point to an economy that is gaining strength into the holiday shopping season.

“It appears that activity held up pretty well despite the government shutdown,” said Ryan Wang, an economist at HSBC Securities USA Inc. in New York. “Housing continues to be cited as an underlying source of growth for both manufacturing and non-manufacturing firms. Activity continues to expand at a steady pace.”

Stocks declined, snapping two days of gains for the Standard & Poor’s 500 Index, as investors awaited data later this week on economic growth and employment. The S&P 500 fell 0.3 percent to 1,762.97 at the close in New York.

Economists’ Estimates

Estimates of the 79 economists in the Bloomberg survey for the October reading ranged from 52 to 56.3. Since July 2009, a month after the last recession ended, the index has averaged 53.9 through last month.

The figure includes industries make up almost 90 percent of the economy, ranging from utilities and retail to health care, housing and finance.

“The shutdown has definitely impacted some of the psyche, but we’re not seeing it in the numbers,” Anthony Nieves, chairman of the survey, said on a call with reporters following the release. “It may translate into a slowing down the road, but as it stands right now, it didn’t translate into the numbers.”

Retail and real estate were among 10 industries that reported growth in October, while construction firms, transportation companies and food services were among the eight that indicated contraction, today’s figures showed.

The ISM’s measure of business activity increased to 59.7 from 55.1, the report showed. A gauge of employment in non-manufacturing industries rose to 56.2 from 52.7.

The group’s measure of new orders in the service industries decreased to 56.8 last month from 59.6 in September.

Factory Gauge

The ISM’s manufacturing index, released last week, unexpectedly rose to 56.4, the highest since April 2011, from 56.2 a month earlier as improving export markets accompanied a boost in domestic demand.

A report in the U.K. today showed services unexpectedly accelerated in October at the fastest pace in 16 years as the economy showed signs of pulling away from the rest of Europe. A gauge of activity rose to 62.5 from 60.3 in September, Markit Economics said today in London.

The report came as the European Commission forecast the U.K. economy will grow 2.2 percent next year, twice the pace of the euro area and more than Germany and France. The euro area will grow 1.1 percent in 2014, less than the 1.2 percent forecast in May, the European Commission projected.

In the U.S., gains this year in homebuilding have boosted services providers such as real-estate companies and home-improvement retailers. Today’s report showed the real estate and finance and insurance industries among those reporting growth in October.

Mortgage Rates

Further progress depends in part on borrowing costs. The rate on 30-year home loans averaged 4.1 percent in the week ended Oct. 31, the lowest since June. It reached a two-year high of 4.58 percent in the week ended Aug. 22.

The Federal Reserve will probably keep its main interest rate “quite low for quite some time,” possibly until 2016, amid languid economic growth, said Eric Rosengren, president of the Federal Reserve Bank of Boston.

“You could easily imagine if we have relatively slow growth in the overall economy, even though it picks up from where we are now, that it could be 2016,” Rosengren, who votes on monetary policy this year, said today on CNBC television. “You’d certainly need to have growth 3 percent or faster if you’d want to see short-term rates rising at that point.”

Weyerhaeuser Co., a timber supplier and developer based in Federal Way, Washington, expects to close more than 1,100 homes in the last three months of this year, up about 35 percent from a year ago, President and Chief Executive Officer Doyle Simons said.

Housing Fundamentals

“We continue to be encouraged as long-term favorable housing fundamentals remain in place,” Simons said on an Oct. 25 earnings call. “With that said, the housing recovery appears to have taken a slight pause due to higher home prices, higher interest rates, although still very low by historical standards, slowing job growth and the antics of our government.”

Standard Pacific Corp. said on Oct. 31 that orders for homes increased 12 percent in the third quarter from the same three months last year, the smallest year-over-year gain since the second quarter of 2011. The Irvine, California-based builder also said it delivered 1,217 homes during the period, the most since the second quarter of 2008.

“Rapid home price appreciation, increased interest rates, and economic and political uncertainty have all contributed to an environment that has impacted consumer confidence and tempered the robust demand we experienced during the first half of the year,” Scott Stowell, president and chief executive officer at Standard Pacific Corp., said on a Nov. 1 earnings call.

Uneven Recovery

“We have always maintained that the housing market recovery would likely be an uneven one and that there would be bumps along the road to recovery. But we are certainly experiencing a few of those bumps now. When looking longer term, we continue to maintain a cautious but positive outlook. The fundamentals for housing still look good,” Stowell said.

Auto dealers have also enjoyed stronger demand this year, putting the industry on pace for its best year since 2007. At the same time, sales have cooled the last two months after climbing in August to the highest since November 2007. Purchases of cars and light trucks sold in October at a 15.2 million annualized rate, little changed from the previous month.

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