Slackening Services Raise Concern of U.S. Job Slump: Economy

Service industries in the U.S. grew at a slower pace than forecast in February as employment slumped by the most in more than five years, showing frigid temperatures have caused the economy to struggle.

The Institute for Supply Management’s non-manufacturing index fell to 51.6, lower than any forecast of economists surveyed by Bloomberg and the weakest since February 2010, the Tempe, Arizona-based group said today. A report from the ADP Research Institute also showed companies added fewer workers than projected last month.

“The weather really affected a lot of the economic data throughout January and February,” said Thomas Simons, an economist at Jefferies LLC in New York, whose forecast of 52 for the ISM gauge matched the lowest in the Bloomberg survey. The employment readings are “consistent with where we are in the labor market right now, which is an economy that would support better hiring if it wasn’t for the weather and will support better hiring once the weather gets better.”

The harsh winter has kept some shoppers away from stores and car dealerships, hurting sales and helping explain why companies are reluctant to take on more staff. The reports further cloud the picture for Federal Reserve policy makers who are trying to gauge the role played by weather in slowing economic growth this year.

Stocks were little changed as investors assessed the Ukraine crisis and the weaker-than-estimated data on services and payrolls. The Standard & Poor’s 500 Index closed at 1,873.81 in New York after the biggest single-day rally so far this year took it to a record 1,873.91 yesterday.

Euro Area

Elsewhere, the news was better. Services in the euro area grew at a faster pace in February, another report showed. A Markit Economics gauge of service providers climbed last month to the highest level since June 2011, led by Germany, Europe’s biggest economy.

Readings greater than 50 for the U.S. ISM index signal growth. The median estimate in a Bloomberg survey of 79 economists was 53.5. Estimates ranged from 52 to 55. From July 2009, a month after the last recession ended, through January, the index averaged 53.9. With today’s report, ADP issued its annual benchmark revisions to incorporate revised payrolls data from the Bureau of Labor Statistics.

The ISM report covers industries that range from utilities and retail to health care, housing and finance, making up almost 90 percent of the economy.

Hiring Slump

The ISM’s employment gauge for non-manufacturing industries slumped to 47.5, the weakest since March 2010, from 56.4. The 8.9-point drop was the biggest since November 2008 in the aftermath of the crash of Lehman Brothers Holdings Inc.

“Companies got a bit aggressive with employment, it seemed, going into the last quarter of 2013,” Anthony Nieves, chairman of the ISM services survey, said in an interview. “Then you have the post-holiday, beginning-of-year lull and the weather as a contributing factor” to slowing sales, which prompted businesses to retrench, he said.

“This may be just a blip on the screen, but we’ll have to wait and see,” said Nieves.

The economy in most regions grew last month even as harsh winter weather impeded hiring, disrupted supply chains, and kept customers away from retailers, the Fed’s Beige Book business survey showed today.

Regional Breakdown

Eight of the central bank’s 12 districts “reported improved levels of activity, but in most cases the increases were characterized as modest to moderate,” the Fed said today in its regional compilation of anecdotal findings that policy makers will use at their next meeting on interest rates. The New York and Philadelphia districts reported declines that were “mostly attributed to the unusually severe weather experienced in those regions.”

Another report today also showed there was a pullback in hiring at the start of 2014. Company payrolls climbed by 139,000 workers in February after a revised 127,000 gain in January that was lower than initially reported, according to Roseland, New Jersey-based ADP. It marked the weakest two months since August-September 2012. The median forecast of 39 economists surveyed by Bloomberg called for a 155,000 advance.

ADP’s numbers have missed the mark in tracking the government’s jobs figures over the prior couple of months. The group’s initial estimates showed a 238,000 gain in December employment followed by a 175,000 January increase. That compares with the Labor Department’s initial estimate of an 87,000 December gain and a 142,000 increase in January.

Employment Forecast

A Labor Department report due March 7 may show total payrolls, which include government jobs, rose by 150,000 last month after a 113,000 gain in January, based on the Bloomberg survey median. The jobless rate is projected to hold at a more than five-year low of 6.6 percent.

Other portions of today’s ISM report held up better than employment. The group’s business activity index, a measure of confidence, declined to 54.6 from 56.3. The measure of new orders increased to 51.3 last month from 50.9 in January.

The ISM’s manufacturing index, released earlier this week, expanded more than projected to 53.2 from 51.3 a month earlier. Measures of orders and inventories strengthened while production contracted.

Companies’ inability to get the parts they need probably slowed production, Bradley Holcomb, chairman of the Institute for Supply Management’s factory survey, said on a conference call with reporters.

Housing Cools

Housing is among areas also impeded by bad weather as frozen ground kept builders from starting work and buyers from shopping for properties.

“Certainly, in the most recent quarter, weather conditions in most states across the country had an adverse impact on sales,” Larry Sorsby, chief financial officer at Red Bank, New Jersey-based Hovnanian Enterprises Inc., said at a Feb. 25 finance conference. “There’s not as much job growth to give the consumers as much confidence as they need for us to have a typical homebuilding recovery.”

Fed policy makers meet on March 18-19 to decide whether to maintain monthly reductions in the pace of asset purchases and make adjustments to guidance on interest rates.

The central bank is currently buying $65 billion a month in U.S. Treasuries and mortgage-backed securities, a program that has expanded the Fed balance sheet to a record $4.16 trillion. The policy makers have pledged to keep the overnight federal funds rate near zero “well past the time” that unemployment falls below 6.5 percent, especially if inflation stays low.

Fed’s Dilemma

Unusually cold weather has played a part in the soft economic data, though it’s not yet clear how much, Fed Chair Janet Yellen said last week in testimony to the Senate Banking Committee.

“What we need to do and will be doing in the weeks ahead is to try to get firmer handle on exactly how much of that set of soft data can be explained by weather and what portion, if any, is due to a softer outlook,” Yellen said. “So if there’s a significant change in the outlook, certainly we would be open to reconsidering” slowing the pace of tapering, she said.

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