Service Industries Propel Broad Rebound in U.S. Growth

Service providers from construction companies to retailers expanded in May at the fastest pace in nine months, signaling a broad-based rebound in the U.S. economy after a dismal first quarter.

The Institute for Supply Management’s non-manufacturing index climbed to 56.3, the highest reading since August, from 55.2 in April, the Tempe, Arizona-based group said today. Readings greater than 50 signal expansion. Seventeen of the 18 industries surveyed showed improvement.

“The strong momentum we saw the past few months is being sustained,” said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities USA LLC in New York, who projected the ISM index would climb to 56.2.

The figures, combined with a pickup in manufacturing reported by ISM earlier this week, point to gains in business and consumer spending that will probably lift growth and spur employment after the world’s biggest economy shrank from January through March. Data in two days is projected to show payrolls increased in May by more than 200,000 workers.

The ISM report “certainly signals growth to 4 percent and employment growth in excess of 200,000,” said Mulraine. Revised government figures last week showed gross domestic product contracted at a 1 percent annualized rate in the first quarter as harsh winter weather held back the economy.

Other reports today were less upbeat about the outlook for employment and growth as a survey showed payrolls rose less than projected in May and the trade deficit swelled in April.

Stocks Climb

Stocks rose, with benchmark indexes at record levels, amid the better-than-forecast data on service industries and before a European Central Bank decision on stimulus and the monthly employment report. The Standard & Poor’s 500 Index advanced 0.2 percent to 1,927.88 at the close in New York.

Service industries also performed well overseas as a report from the U.K. showed faster growth than economists forecast in May and confidence about the outlook prompted companies to boost hiring.

Today’s ISM data followed a June 2 report that showed manufacturing expanded in May at the fastest pace of the year as factories responded to increased orders by cranking up production. The report was marred by two corrections as the purchasing managers’ group tried to fix an error in its computer software.

The ISM services survey covers an array of industries including utilities, retailing, health care and finance that make up almost 90 percent of the economy. It also includes construction, mining and agriculture.

Orders Climb

The ISM’s measure of new orders rose to the highest level since January 2011 and its employment gauge also climbed. The business activity index, which parallels the manufacturing production gauge, increased to a more than two-year high.

“This is all derived from increased confidence, not just consumer, but it’s company-related,” Anthony Nieves, chairman of ISM’s non-manufacturing survey committee, said on a conference call with reporters. “At this level of business activity and new orders in the pipeline, employment is going to have to go up.”

A report from Roseland, New Jersey-based ADP Research Institute today indicated bigger, sustained gains in hiring will take longer to materialize. Employment at companies rose by 179,000 workers in May, the smallest increase in four months, the group said.

Private and government employers added 288,000 workers to payrolls in April, a Labor Department report showed last month. Another 215,000 were taken on in May, based on the median estimate in a Bloomberg survey of economists ahead of a June 6 government update.

More Jobs

An improving labor market is helping sustain spending. Auto sales in May rose to a 16.7 million annualized rate, the strongest since February 2007, according to data from Ward’s Automotive Group.

The pickup does have a downside as growing demand is leading to an increase in imports that is swelling the U.S. trade deficit, according to a Commerce Department report today. The gap widened 6.9 percent to $47.2 billion in April, a two-year high, as companies bought record amounts of consumer goods, business equipment and automobiles from overseas.

Demand from abroad for American-made goods was little changed, the report also showed.

Growth Disparities

“The U.S. economy is expanding and so we’re pulling in imports,” said David Berson, chief economist at Nationwide Insurance in Columbus, Ohio, whose forecast for a deficit of $42.2 billion was the largest in the Bloomberg survey. “What was unexpected is that exports really didn’t move at all. This is a sign of relative weakness abroad, particularly in Europe, and also China has clearly slowed.”

Part of the jump in imports included growing demand for mobile telephones. Samsung Electronics Co., the world’s largest smartphone maker, started selling its Galaxy S5 mobile phone internationally on April 11. The Suwon, South Korea-based company is offering more than $600 worth of incentives for the device to spark demand. S5 sales are expected to surpass those of the S4, the company said without providing details.

The trade deficit with South Korea jumped to a record in May, according to today’s Commerce Department figures.

Swelling imports mean fewer of the goods and services purchased by American consumers and businesses are actually made in the U.S., which will subtract from economic growth.

Economists at Morgan Stanley in New York reduced their tracking estimate for second-quarter growth to 3.5 percent from 4 percent after today’s trade report. Government revisions to the export and import figures that also swelled the deficit for the first quarter means the economy contracted by even more than 1 percent, Ted Wieseman said in a research report.

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