U.S. Service Industries Grow at Second-Fastest Pace in a Decade

Service producers unexpectedly expanded in October at the second-fastest pace in a decade, allowing the U.S. economy to forge ahead even as factories remain bogged down by sluggish overseas demand.

The Institute for Supply Management’s non-manufacturing index advanced to 59.1 from 56.9 the prior month, the Tempe, Arizona-based group said Wednesday. A gauge above 50 denotes expansion, and the reading exceeded all estimates in a Bloomberg survey.

Firmer home sales, job gains, low inflation and cheap borrowing costs are driving business at service providers, a reassuring sign that the economy will withstand malaise in manufacturing. Such domestic demand, which encouraged stepped-up service-related hiring last month, helps explain why the Federal Reserve may raise interest rates next month.

“Given that the consumer continues to do the heavy lifting for the economy, that’s going to benefit services,” Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, said before the report. “The job market’s tightening, we’re starting to see some glimpses of an acceleration in wage growth, and all that bodes well for the non-manufacturing part of the economy.”

The median forecast in a Bloomberg survey of 74 economists was 56.5, with estimates ranging from 54.5 to 58.1. The October figure also exceeded the measure’s average of 57.3 this year through September.

The increase left the non-manufacturing gauge 9 points higher than the group’s measure of factory activity, the widest differential since February 2001. The ISM manufacturing index was little changed last month at 50.1, the weakest since May 2013 and a sign that factories remain battered by soft overseas demand.

Services Employment

The ISM’s measure of services employment advanced to 59.2, the second-highest since August 2005, from 58.3 in September. The new orders gauge increased to 62 in October from 56.7 the prior month.

The business activity index, which parallels the ISM’s factory production gauge rose to 63 from 60.2. A measure of prices paid increased to 49.1, indicating costs were falling at a slower pace, from 48.4.

The ISM services survey covers an array of industries, from retailing to health care, that make up almost 90 percent of the economy. It also factors in agriculture and construction.

The latest sign of resilient consumer demand was a pickup in motor vehicle sales. More than an annualized 18.1 million autos were purchased in October after a similar result a month earlier, the strongest back-to-back performance since 2000, based on Ward’s Automotive Group data.

Sales are surging as job growth, available credit and low gas prices encourage shoppers to replace aging models, especially with sport utility vehicles.

Federal Reserve

Fed policy makers, at the close of their October meeting, signaled that they see a fading negative impact on the U.S. from global economic developments. Central bankers removed a line from their September statement stating that global economic and financial developments “may restrain economic activity somewhat,” saying only in October that that they are monitoring the international situation.

The Federal Open Market Committee also added a reference to the possibility of increasing the rate “at its next meeting” in December, based on “realized and expected” progress in reaching goals.

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