Growth at U.S. Service Providers Near Strongest in Decade

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Growth at service industries from retailers to restaurants hovered in August near the strongest in a decade, a sign U.S. demand was buoyant in the face of financial-market turmoil.

While the Institute for Supply Management’s non-manufacturing index eased to 59 from 60.3 the prior month, it was higher than projected and marked the second-highest reading since 2005, the Tempe, Arizona-based group’s report showed Thursday. Figures above 50 signal expansion, and the Bloomberg survey median forecast called for 58.2.

Orders, backlogs, output and employment in the industries that account for almost 90 percent of the economy were running at faster rates in August than in the first seven months of the year on average. While a housing rebound and steady consumer spending are bolstering demand, concerns about global markets have yet to temper corporate expansion plans in a big way.

“This sector has been insulated from what’s going on,” Anthony Nieves, chairman of the ISM non-manufacturing survey, said on a conference call with reporters after the release. While there was some cooling off, “employment will continue to grow.”

The ISM’s new orders measure eased to 63.4 in August from a 10-year high of 63.8 a month earlier, while a gauge of backlogs jumped to the highest since 2007. The business activity index, which parallels the ISM’s factory production gauge, eased by 1 point to 63.9.

Service Employment

The measure of employment decreased to 56 in August from 59.6, while the index of prices paid fell to a four-month low.

The group’s non-manufacturing survey covers industries including utilities, retail, health care, construction and agriculture. These are relatively less directly influenced by the global economic weakness that’s holding back American factories.

Manufacturing expanded in August at the slowest pace since May 2013 as anemic demand from overseas markets such as China, along with higher inventories in the first half of 2015, translated into leaner factory order books, ISM’s Sept. 1 figures showed. The factory index fell to 51.1, with a measure of exports matching the weakest reading since April 2009.

Service producers grew more concerned in August with the level of their inventories. The share of businesses that said stockpiles were too high rose to 39 percent, the most since February 2009.

Some Oversupply

There’s “a little bit of oversupply,” Nieves said on the call. Given that service providers tend to favor more just-in-time inventories compared with their manufacturing counterparts, they will make a “concerted effort” to reduce stockpiles and achieve a faster balance with demand, he said.

Purchasing managers from 12 industries in August thought their inventories were too high.

Resilient U.S. demand is among the reasons Federal Reserve policy makers have said they are closer to raising interest rates for the first time since 2006.

The economy grew at a 3.7 percent annualized rate in the second quarter, revised up from 2.3 percent and following a 0.6 percent advance the prior three months, according to Commerce Department data. Consumer spending rose 3.1 percent, also higher than an initial estimate. Inventories climbed in the first half of the year by the most since records began in 1947.

Sustained job creation and lower gasoline costs are underpinning Americans’ purchasing power. A report on Friday may show payrolls advanced by about 220,000 in August, and the jobless rate fell to a seven-year low of 5.2 percent.

Housing, which is included in the services industries, is also rebounding as buyers take advantage of historically low mortgage rates. Purchases of new homes and previously-owned dwellings each climbed in July, recent reports showed.