Services Slowdown Highlights Uneven U.S. Expansion: Economy

Services from banking to transportation grew more slowly in November, pointing to a U.S. economy that is making progress in fits and starts heading into the new year.

The Institute for Supply Management’s non-manufacturing index dropped to 53.9 from 55.4 in October, the Tempe, Arizona-based group said today. A gauge above 50 shows expansion among companies that account for almost 90 percent of the economy. Other reports showed company hiring picked up more than projected last month and sales of new houses surged in October.

Gains in employment will probably boost growth next year, helping the U.S. overcome government budget cuts and tax increases that have held back the expansion in 2013. Another report showing exports climbed to a record in October indicates American manufacturers will benefit from a global pickup in demand that will further buttress the expansion.

“This is still a moderate recovery, but the data suggest that the recovery is perhaps a bit stronger than what we saw around the turn of the year,” said Dean Maki, chief U.S. economist in New York for Barclays Plc, who projected the services index would drop. “We do think that 2014 is a better year for U.S. growth.”

The median estimate in a Bloomberg survey of 67 economists projected the ISM index would fall to 55. Forecasts ranged from 53.5 to 57. From July 2009, a month after the last recession ended, through last month, the index has averaged 53.9.

Orders Firm

The November decline was paced by a slowdown in hiring and business activity. The ISM’s new orders gauge for the service industries was little changed, capping its strongest four months since mid-2011.

“It’s still a fairly strong report,” Anthony Nieves, chairman of the ISM services survey, said on a conference call with reporters. Respondents “feel confident finishing up this fourth quarter. There is still a little bit of uncertainty, but overall, there seems to be strength in the non-manufacturing sector.”

The slowdown in hiring was at odds with another report today. Companies boosted payrolls by 215,000 workers in November, exceeding the most optimistic forecast in a Bloomberg survey and the biggest gain in a year, according to data from the ADP Research Institute in Roseland, New Jersey. The median forecast of economists called for a 170,000 advance.

The figures come two days before the Labor Department issues its monthly jobs report. Economists polled by Bloomberg project employment increased by 185,000 last month after a 204,000 gain in October, according to the median forecast.

Payroll Projection

Taking the ADP and ISM employment measures into account would yield a gain of about 200,000 jobs, according to calculations by economists at Credit Suisse in New York. The bank stuck to its forecast for an increase of 180,000, “with more upside than downside risk around that projection,” economist Jay Feldman said in a research note.

Stocks fell for a fourth day, the longest slump in 10 weeks for the Standard & Poor’s 500 Index, as investors weighed economic data for clues on the timing of Federal Reserve stimulus cuts and watched budget negotiations. The S&P 500 dropped 0.1 percent to 1,792.81 at the close in New York.

A report from the Commerce Department showed purchases of new homes surged in October from a more than one-year low the prior month, signaling buyers are starting to take higher mortgage rates in stride. Sales jumped 25.4 percent to a 444,000 annualized pace, following a 354,000 rate in the prior month that was the weakest since April 2012.

Home Sales

The report included combined October and September data after the figures were delayed due to the government shutdown. Purchases were down 6.6 percent in September from a 379,000 annualized pace in August that was weaker than the previously reported 421,000. The revisions and September data indicate the market took a bigger hit than originally estimated following the increase in mortgage rates.

The October rebound from September was the biggest one-month surge since May 1980.

“The worst of the impact of higher mortgage rates seems to be behind us,” said Millan Mulraine, director of U.S. rates research at TD Securities USA LLC in New York, who forecast an increase in sales to 445,000. “If we continue to see improvements in employment and if mortgage rates stay where they are, we should see these levels sustained.”

Also today, figures from the Commerce Department showed the trade gap decreased 5.4 percent to $40.6 billion in October from a $43 billion shortfall the prior month as exports climbed to a record level.

Record Exports

Sales of goods to China, Canada and Mexico were the highest ever, pointing to improving global demand that will benefit American manufacturers. In addition, an expanding U.S. economy is helping boost growth abroad as purchases of products from the European Union also climbed to a record in October.

“We are starting to see some recoveries abroad, and in general, stronger global growth is going to lead to a pickup in export growth over time,” Jay Bryson, global economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said in an interview. “Consumers are two-thirds of the economy, and consumer spending continues to grind higher. All components of domestic demand outside of the government are growing.”

Data on holiday demand has been mixed, with Cyber Monday sales sending online shopping toward a single-day record as Inc. and EBay Inc. siphoned consumers from brick-and-mortar stores. Purchases at stores and websites fell 2.9 percent to $57.4 billion during the four days beginning with the Nov. 28 Thanksgiving holiday, according to a survey commissioned by the National Retail Federation.

Housing, Autos

Housing and autos remain bright spots. More home-construction permits were issued in October than at any time in the past five years, a sign the residential real-estate market is gaining momentum heading into 2014, figures from the Commerce Department showed last week.

“The market’s been recovering along with overall economy and notwithstanding the slight pause we’ve experienced in the latter half of the year” when mortgage rates jumped, David Valiaveedan, vice president of finance at Red Bank, New Jersey-based Hovnanian Enterprises Inc., said at a Nov. 14 housing conference.

Auto sales remain on pace for their best year since 2007. General Motors Co. and Chrysler Group LLC led November U.S. sales gains that met or exceeded analysts’ estimates as dealers stepped up promotion of year-end offers to try to trim inventory.

Fed Anecdotes

Gains in manufacturing, technology and housing kept the economy expanding at a “modest to moderate” pace from early October through mid-November, the Federal Reserve said in its Beige Book today, which contains anecdotal reports from each of the 12 districts of the central bank.

The report gives policy makers clues on the state of the labor market and the economy as they debate whether to start reducing $85 billion in monthly bond purchases.

More U.S. chief executive officers project a pickup in sales, capital spending and hiring in the next six months, another survey showed today. The Business Roundtable’s economic outlook index climbed to 84.5 in the fourth quarter from 79.1 in the previous three months, the Washington-based trade group said. Readings greater than 50 are consistent with economic expansion.

Before it's here, it's on the Bloomberg Terminal.