Services in U.S. Grow at Slower Pace Than Forecast: Economy

Service industries unexpectedly grew at a slower pace in December, a sign that some parts of the U.S. economy are improving in fits and starts.

The Institute for Supply Management’s non-manufacturing index fell to a six-month low of 53 from 53.9 in November, the Tempe, Arizona-based group reported today. The median projection in a Bloomberg survey of economists was 54.7. Readings above 50 indicate growth in the industries that make up almost 90 percent of the economy.

Gains among construction companies and retailers were offset by slowdowns at hotels and restaurants, entertainment and real-estate firms, showing it will take time for the improvement in growth to ripple through all sectors of the world’s largest economy. The report was at odds with other data that showed factory orders were picking up as manufacturing gained momentum entering 2014.

“I don’t view this as any kind of major setback,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts, who projected a reading of 53.1. “It’s not all gangbusters. There’s still a little bit of weakness out there, it’s going to be a little bit uneven. It will be good, but it will be uneven.”

Estimates in the Bloomberg survey of 69 economists ranged from 53 to 57.7. The group’s measure includes industries that range from utilities and retail to health care, housing and finance. The non-manufacturing index averaged 54.7 last year, compared with 54.6 in 2012 and the strongest reading since 2006.

Stocks Decline

Stocks fell for a third day, the longest stretch of declines for the Standard & Poor’s 500 Index to start a year since 2005, after the report on services. The S&P 500 dropped 0.3 percent to 1,826.77 at the close in New York.

Services in the rest of the world also cooled last month. In the euro area, a measure decreased to 51 from a November reading of 51.2, while in the U.K., services growth declined for a second month after surging the most in 16 years at the start of the fourth quarter, according to Markit Economics and the Chartered Institute of Purchasing and Supply. In China, a gauge of the industries decreased to 50.9 in December from 52.5, HSBC Holdings Plc and Markit said.

A report from the Commerce Department today showed orders placed with U.S. manufacturers rebounded in November. The 1.8 percent increase followed a 0.5 percent decline a month earlier that was smaller than initially reported.

New Orders

For service industries, last month marked the biggest decline in bookings since November 2008. The ISM’s measure of new orders decreased to 49.4, the lowest since May 2009, from 56.4 in November. Industries reporting declining demand included real estate, mining, transportation and warehousing, food services and entertainment and recreation. Six reported growth in orders, including retail trade, construction and finance.

“It’s not alarming at this point in time,” Anthony Nieves, chairman of the non-manufacturing survey, said on a conference call with reporters after the report. “Business activity is still up, employment is still up, which leads me to believe that companies are still confident that they have enough in the pipeline.”

A gauge of employment in non-manufacturing industries rose to 55.8 from a six-month low of 52.5 in November. Business activity eased to 55.2 from 55.5, the report showed.

The ISM’s manufacturing index, issued Jan. 2, eased to 57 in December from 57.3 a month earlier, which was the highest level since April 2011. Measures of orders and employment advanced, with the latter reaching its highest level since June 2011.

Auto Dealers

Motor vehicle dealers were among those benefiting from stronger auto sales in 2013. U.S. auto sales increased 7.6 percent last year to 15.6 million, the best for the industry since 2007, even as December purchases fell short of analysts’ estimates, rising 0.3 percent to 1.36 million, according to Autodata Corp. Cold weather may have kept buyers from dealers’ lots.

The housing recovery has also been a bright spot for the economy, creating jobs and driving demand for home-related goods. Construction spending climbed 1 percent in November, the Commerce Department said last week, with outlays reaching the highest point since March 2009. Though rising mortgage rates have slowed the pace of purchasing, a lack of inventory is keeping builders busy.

Housing Demand

“The fundamental drivers of a housing recovery remain in place, although conditions are not as favorable as they were six months ago,” said Jeffrey T. Mezger, chief executive officer at Los Angeles-based KB Home, in a Dec. 19 earnings call. “Resale inventory levels have been slowly increasing but still remain low by historical standards. Affordability is at attractive levels, demographics remain strong and there’s pent-up demand due to delayed household formation.”

Federal Reserve Chairman Ben S. Bernanke said in a Jan. 3 speech in Philadelphia that the headwinds that have held back the economy may be abating.

“The combination of financial healing, greater balance in the housing market, less fiscal restraint, and, of course, continued monetary policy accommodation bodes well for U.S. economic growth in coming quarters,” he said in prepared remarks.

A stronger economy and improvement in the labor market prompted the Fed to dial back its bond-buying program aimed at bolstering the expansion. The central bank announced in December that it would reduce its monthly purchases to $75 billion from $85 billion.

December employment data, due at the end of this week, is projected to show the job market sustained momentum. The median forecast in a Bloomberg survey calls for a 195,000 increase in payrolls.

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