Fastest Services Growth Since 2005 Lifts Expansion: Economy

Service providers such as retailers and construction firms expanded in August at the fastest pace in nine years, pointing to greater momentum in the economy that’s generating jobs and brightening Americans’ spirits.

The Institute for Supply Management’s non-manufacturing index climbed to 59.6, the highest since August 2005, from 58.7 a month earlier, the Tempe, Arizona-based group said today. Bloomberg’s weekly measure of consumer sentiment rose to the second-highest level in a year and filings for unemployment benefits were little changed, other figures showed.

The improvement at service providers was broad-based and, combined with faster manufacturing growth, raises the odds of a self-supporting cycle of more spending and job gains that could further propel the expansion. Shifting the world’s largest economy into a higher gear depends in part on a pickup in worker pay that has been elusive.

“It’s probably the most favorable backdrop we’ve had in some time,” said Laura Rosner, U.S. economist at BNP Paribas in New York. “We’ve not yet seen if this is self-reinforcing with respect to consumption, and I think there are still headwinds out there weighing on consumers, but the rest of the economy is in pretty good shape.”

Today’s ISM report showed more service providers were stepping up hiring. The group’s employment gauge climbed to the highest since February 2006. More companies are hiring as their sales improve. The business activity index, which parallels the ISM’s factory production gauge, was the strongest since December 2004.

Jobless Claims

Sustained demand is prompting employers to limit dismissals and bring on additional help. Applications for unemployment benefits were little changed last week, according to a Labor Department report today. Jobless claims rose by 4,000 to 302,000 in the week ended Aug. 30. The total number of people on benefit rolls fell to the lowest level in more than seven years.

“Layoff activity is very low,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, who correctly projected the claims reading. “Companies have a need for the current people on the books and are looking to hire more.”

Employers, excluding government agencies, took on 204,000 workers in August after a 212,000 gain the prior month, according to figures today from the Roseland, New Jersey-based ADP Research Institute. The hiring was broad-based. Factory employment rose 23,000 last month, construction companies added 15,000 workers and service industries boosted employment by 164,000.

The improved outlook for hiring helps explain why Americans are more optimistic. The Bloomberg Consumer Comfort Index rose to 37.7 in the period ended Aug. 31 from 37.3 the prior week. A measure of personal finances matched the strongest reading since April 2008.

Stocks Fall

Stocks fell for a third day, giving the Standard & Poor’s 500 Index its longest slump since June, as energy producers sank with oil prices to overshadow new stimulus from the European Central Bank. The S&P 500 declined 0.2 percent to 1,997.65 at the close in New York.

The August non-manufacturing index exceeded the 57.7 median forecast in a Bloomberg survey of 74 economists. Readings greater than 50 signal expansion. Estimates ranged from 53.2 to 59.5. Last month’s figure matched the fourth-highest in records going back to 1997.

The services survey covers an array of industries, including utilities, retailing, health care and finance, that account for almost 90 percent of the economy. Earlier this week, the ISM said its manufacturing index climbed to the highest since March 2011.

August Employment

Greater employment opportunities that fuel bigger gains in consumer spending will probably help sustain growth at service industries. A Labor Department report tomorrow is projected to show payrolls climbed by 230,000 workers last month after a 209,000 increase in July, based on the median estimate in a Bloomberg survey. That would be the seventh straight gain in excess of 200,000, the longest such run since 1997.

“We believe home-improvement spending will continue to progress in tandem with strengthening job and income growth,” Robert Niblock, chief executive officer at Mooresville, North Carolina-based Lowe’s Cos., said on an Aug. 20 earnings call. “Homeowners’ views around personal finances and home values continue to improve.”

The pickup is driving auto sales. Purchases of cars and light trucks rose to a 17.5 million annualized rate in August, the highest since January 2006, from a 16.4 million pace a month earlier, based on data from Ward’s Automotive Group.

Vehicle Demand

Demand for motor vehicles extends beyond U.S. shores. Growing overseas purchases of American automobiles, as well as petroleum products, helped reduce the U.S. trade deficit in July to a six-month low. The gap shrank 0.6 percent to $40.5 billion from $40.8 billion a month earlier, the Commerce Department said today.

“Auto exports blew out,” said Brian Jones, senior U.S. economist at Societe Generale in New York. “We know our own demand for autos is pretty solid. This is indicating the rest of the world’s is as well.”

Shipments of goods, including autos and non-petroleum products, were the highest on record.

The improvement in the trade balance led economists at Barclays Plc to raise their tracking estimate for third-quarter gross domestic product to a 2.7 percent annualized rate from 2.5 percent.

Job gains that help lift wages at the lower end of the income scale would provide a bigger push for some retailers. Goodlettsville, Tennessee-based Dollar General Corp., where sales grew 7.5 percent in the second quarter, sees buyers continuing to spend carefully.

The consumer, “although resilient in the face of economic uncertainty, remains cautious,” Chief Executive Officer Richard Dreiling said in an Aug. 28 earnings call. “As has been the case for the last few quarters, the competitive environment continued to be elevated during the second quarter.”

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