Expansion at U.S. Service Industries a Good Sign for Economy

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U.S. March ISM Non-Manufacturing Index Declines

Service providers such as real-estate firms and restaurants expanded in March at about the same pace as a month earlier, a reassuring sign of support for a U.S. economy that’s been held back by headwinds in manufacturing.

The 56.5 reading in the Institute for Supply Management’s non-manufacturing index was in line with last year’s average and little changed from the prior month’s 56.9, the Tempe, Arizona-based group reported Monday. A gauge above 50 shows growth and the March reading matched the median estimate in a Bloomberg survey of economists.

The share of service industries reporting increased orders rose to a four-month high and employment kept expanding, indicating consumers are helping generate sales within the sectors that account for almost 90 percent of the economy. The figures underscore the view of Federal Reserve Bank of New York’s William Dudley that the recent economic weakness is probably temporary.

“The overall fundamentals for domestic demand are still good,” said Kevin Cummins, an economist for UBS Securities LLC in New York, who correctly projected the ISM reading. “We’re seeing income growth and job growth. The recovery should continue, and be led by the consumer.”

Stocks rose after Dudley said the pace of interest-rate increases is likely to be “shallow” once the central bank begins to tighten. The Standard & Poor’s 500 Index advanced 0.7 percent to 2,080.62 at the close in New York.

Fed’s Dudley

The timing of the first rate increase since 2006 “will be data dependent and remains uncertain because the future evolution of the economy cannot be fully anticipated,” Dudley said in a speech Monday in Newark, New Jersey. “I anticipate that the path will be relatively shallow.”

Slow first-quarter growth largely reflected temporary conditions, including unusually harsh winter weather, the president of the New York Fed said.

A separate gauge showed a faster rate of expansion in service industries. The Markit Economics final March index rose to a seven-month high of 59.2 from 57.1 in February, the London-based group said Monday.

“The latest survey highlights a strong underlying pace of U.S. economic growth moving into the second quarter,” Tim Moore, senior economist at Markit, said in a statement. “New business trends across the service sector have picked up especially sharply from the lows seen earlier in the year, and hiring has strengthened as a result.”

The ISM’s services survey covers an array of industries including utilities, retailing, health care and finance. It also factors in construction and agriculture.

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Management and support services, real estate firms, and rental companies led the list of the 14 non-manufacturing industries that reported growth in March.

Estimates of the 71 economists in the Bloomberg survey ranged from 53 to 58.5. The non-manufacturing index averaged 56.3 last year, compared with 54.6 in 2013.

ISM’s measure of new orders among non-manufacturing industries climbed to 57.8 in March from 56.7 the prior month. The group’s employment gauge rose to 56.6 from 56.4 in February.

The employment index “is a strong indicator of what we see for this sector,” Anthony Nieves, chairman of the ISM’s services survey, said on a conference call with reporters after the release. “Companies within these industries still feel strongly about business conditions. Employment is a good indicator that they have that confidence level.”

Factory Gauge

The group’s manufacturing index, released last week, showed the effects on the nation’s factories from the stronger dollar and weaker global markets. The gauge dropped in March to the lowest level since May 2013.

The economy probably expanded at a 1.5 percent annualized pace in the first quarter, according to the median estimate in a Bloomberg survey of economists from March 30 to April 1. That’s down from a 2.2 percent rate in the last three months of 2014.

Consumer spending, which climbed in the fourth quarter at the fastest pace in almost nine years, barely rose in February after declining a month earlier. Adjusted for inflation, purchases rose 0.3 percent in January after falling 0.1 percent the prior month, according to Commerce Department data.

Household consumption expanded at a 4.4 percent annualized rate from October through December, boosted by low fuel prices and job gains in 2014, according to Commerce Department data.

Labor Market

The pickup in the ISM’s non-manufacturing employment gauge indicates the job market may be set to improve after the Labor Department reported Friday the smallest gain in payrolls since December 2013. The 126,000 increase broke a yearlong string of monthly gains exceeding 200,000, which was the longest such stretch since 1995.

Even with the economy’s setback in the first quarter, March auto sales figures indicate consumers may be gearing up to spend. Motor vehicle purchases advanced to a 17.1 million annualized rate, matching the strongest pace since August, based on data from Ward’s Automotive Group.

“We expect a firming labor market and still-low fuel prices and interest rates to support renewed momentum in economic activity as spring takes hold,” Emily Kolinski Morris, chief economist at Ford Motor Co., said on an April 1 sales call.

Still-cheap gasoline is helping boost disposable income. The nationwide average cost of a gallon was $2.39 on Sunday, down from a high of $3.70 a year earlier, according to figures from AAA, the largest U.S. auto group.

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