Service industries grow at fastest pace since Aug.

WASHINGTON – Service industries expanded in May at the fastest pace in nine months as orders picked up, indicating improving sales will help the U.S. economy strengthen.

The Institute for Supply Management’s non-manufacturing index climbed to 56.3 last month from 55.2 in April, the Tempe, Ariz.-based group said Wednesday. Readings greater than 50 signal expansion. The median forecast of economists in a Bloomberg survey called for 55.5. The gauge of orders reached a more than three-year high.

The third straight gain in the services measure shows demand is strengthening as companies add workers and rising stock and home prices give consumers the wherewithal to keep spending. The advance, along with the fastest pace of manufacturing this year, points to a second-quarter rebound in the economy.

“It suggests the strong momentum we saw the past few months is being sustained to carry growth from Q2 into the second half of the year,” said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities USA LLC in New York, who projected a reading of 56.2.

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Estimates in the Bloomberg survey of 75 economists ranged from 54 to 58. The index has averaged 54 so far this year, compared with 54.7 in 2013.

Stocks fluctuated as investors weighed the services data and another report on private employment. The Standard & Poor’s 500 Index fell 0.1 percent to 1,921.84 at 10:25 a.m. in New York.

May employment

Among other reports released Wednesday, companies in the U.S. added fewer workers than forecast last month. Employment rose 179,000 in May, the smallest gain in four months, after a 215,000 increase that was less than initially estimated, figures from the Roseland, N.J.-based ADP Research Institute showed.

Data from the Commerce Department showed the trade deficit reached a two-year high in April as companies bought record amounts of consumer goods, business equipment and automobiles. The gap widened 6.9 percent to $47.2 billion.

Wednesday’s data follow the ISM’s June 2 report on May manufacturing in which the supply managers’ group had to issue two corrections. Because computer software introduced an error in the high-profile factory survey, the ISM is now “manually calculating” both the manufacturing and services data against the computer-generated numbers, Kristina Cahill, a spokeswoman said Tuesday.

Factory index

The factory index rose in May to 55.4, the highest level this year, from 54.9 the prior month as orders and output picked up.

The ISM services 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. Seventeen of 18 service industries reported growth in May, Wednesday’s ISM report showed.

The ISM’s measure of new orders among non-manufacturing industries rose to 60.5, the highest since January 2011, from 58.2. The group’s employment gauge climbed to 52.4 in May from 51.3 the month before. The business activity index, which parallels the manufacturing production gauge, increased to 62.1, the highest since February 2011, from 60.9. An index of prices paid advanced to 61.4 from 60.8.

“This is all derived from increased confidence, not just consumer, but it’s company-related,” Anthony Nieves, chairman of ISM’s non-manufacturing survey committee, said on a conference call with reporters. “At this level of business activity and new orders in the pipeline, employment is going to have to go up.”

Auto sales

An improving labor market is helping to sustain spending. Auto sales in May improved to a 16.7 million annualized rate, the strongest since February 2007, according to data from Ward’s Automotive Group.

Companies added 288,000 workers in April, a report last month showed, and probably added another 215,000 in May, based on the median estimate in a Bloomberg survey of economists ahead of a Labor Department report on June 6.

Demand for homes has also boosted prices and bolstered balance sheets even as progress has slowed since last year. Home prices in 20 U.S. cities rose 12.4 percent in March from a year earlier, an S&P/Case-Shiller report showed May 27.

Even so, AutoZone Inc. CEO William C Rhodes III says consumers remain challenged.

Frugal customers

“We continue to believe our customers are financially strained,” Rhodes said in a May 27 earnings call for the Memphis, Tenn.-based specialty automotive parts retailer. “Based on the dialogue we see across retail, the low-end consumer seems to be particularly challenged.”

Wage gains have been slow to materialize. Average hourly earnings were up 1.9 percent in the 12 months ended in April, the smallest gain this year. Consumers have dipped into savings to maintain spending. The saving rate in April, while up from a month earlier, is close to the lowest level since 2008, Bureau of Economic Analysis data shows.

“If you look at the lower income levels, some of the lower-income levels have not prospered as much,” Don Thompson, chief executive officer at Oak Brook, Ill.-based McDonald’s Corp., the world’s largest restaurant chain, said in a May 28 presentation. “So, the value component is important. Having said that, we also see that there is this category of premium burgers.”

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