Services in U.S. Expand at Fastest Pace Since 2005: Economy

Service industries such as builders and retailers grew in July at the fastest pace since December 2005, signaling the U.S. economy was hitting its stride entering the second half of 2014.

The Institute for Supply Management’s non-manufacturing index increased to 58.7, exceeding the highest estimate in a Bloomberg survey of economists, from the prior month’s 56, the Tempe, Arizona-based group’s report showed today. Readings greater than 50 indicate expansion. The median estimate in the Bloomberg survey called for 56.5.

Prospects for the world’s largest economy are improving as the group’s orders index reached an almost nine-year high, reflecting broad-based gains. Combined with another report showing factory bookings are also jumping, the pickup in demand raises the odds the job market will extend its recent progress.

“We’re seeing numbers that we haven’t seen since well before the financial crisis and recession, and they seem to be more sustained,” said Terry Sheehan, an economist at Stone & McCarthy Research Associates in Princeton, New Jersey, whose ISM index projection of 57 was among the highest in the Bloomberg survey. The strengthening is “pretty much across the board for business activity, new orders and employment.”

Other services figures from abroad today were mixed. Non-manufacturing in China stagnated in July as an index fell to the lowest in data going back to 2005. Euro-area service industries expanded last month less than initially estimated and they strengthened in the U.K. more than economists forecast.

Stocks Fall

Stocks declined, with the Standard & Poor’s 500 Index sinking to the lowest since May, as energy shares tumbled and concern increased over escalating tensions in Ukraine. The S&P 500 dropped 1 percent to 1,920.21 at the close in New York.

Sixteen U.S. non-manufacturing industries reported growth in July, led by construction and educational services. Estimates of the 73 economists in the Bloomberg survey ranged from 54.5 to 57.5. The gauge has averaged 55 this year compared with 54.7 in 2013.

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

“Conditions are definitely improving,” Anthony Nieves, chairman of the ISM’s services survey, said on a conference call with reporters after the release. “It’s coming out of just about every industry that makes up this non-manufacturing sector.”

Orders Jump

The ISM’s measure of new orders among service producers surged in July to the highest since August 2005. The index of bookings has increased every month this year, the longest such stretch since records began in 1997.

The group’s employment gauge advanced to a six-month high, while the business activity measure, which parallels the ISM’s factory production index, posted its strongest reading since February 2011.

Hilton Worldwide Inc. is among service providers indicating gains in demand will extend into 2015. Hilton reported Aug. 1 that sales climbed to $2.67 billion in the second quarter from $2.38 billion in the same period last year. Net income rose 24 percent from a year earlier, to 21 cents a share.

“We remain optimistic heading into the back half of the year,” Christopher Nassetta, chief executive officer of the McLean, Virginia-based hotel and resort manager, said on an earnings call. “The setup for next year feels terrific -- really, really strong.”

Producers Upbeat

Manufacturers are also growing more upbeat. The ISM’s factory index, released last week, climbed in July to the highest level since April 2011. Orders and production expanded at their fastest paces of the year, helped by increases in purchases of automobiles and business equipment.

A report from the Commerce Department today showed factory orders in June rose 1.1 percent, the most in three months and almost double the median projection in a Bloomberg survey. Bookings for non-military equipment excluding aircraft, a proxy for capital equipment demand, advanced 3.3 percent.

Cars and light trucks sold last month at a 16.4 million annualized rate after a 16.9 million pace in June that was the fastest in almost eight years, according to data from Ward’s Automotive Group.

Labor-market gains also are helping spur demand even as wage growth remains sluggish. Employers added 209,000 jobs in July, Labor Department data showed last week. It marked the sixth month of 200,000-plus payroll additions, the longest such period since 1997.

Unemployment Rate

The improving conditions drew more job seekers into the labor force, pushing up the unemployment rate to 6.2 percent from 6.1 percent a month earlier.

The overall progress in the economy and labor market has allowed Federal Reserve policy makers to further reduce their bond-buying while keeping interest rates at record lows. The Federal Open Market Committee announced last week that it would trim monthly asset purchases by $10 billion, to $25 billion. The central bankers repeated that they’ll probably reduce purchases in “further measured steps,” while keeping interest rates low for a “considerable time.”

(Updates with closing stocks in sixth paragraph.)
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