Service industries in U.S. expand at fastest pace since 2005

Service industries in the U.S. expanded in July at the fastest pace since December 2005, showing the economy was building more momentum at the start of the second half of 2014.

The Institute for Supply Management’s non-manufacturing index increased to 58.7 from the prior month’s 56, the Tempe, Ariz.-based group said Tuesday. A reading greater than 50 shows expansion. The median estimate in a Bloomberg survey of economists was 56.5. A measure of orders climbed to an almost nine-year high.

The pickup among service providers, combined with the strongest rate of growth in more than three years at American factories, shows the world’s largest economy was strengthening at the start of the third quarter. Faster payroll growth is helping fuel consumer demand, raising the odds a self-reinforcing cycle of increased hiring and spending is underway.

“The U.S. economy has continued to pick up a little bit of steam,” Guy Berger, a U.S. economist at RBS Securities Inc. in Stamford, Conn., said before the report. “More jobs mean more money in people’s pockets, which means they can spend more, which leads businesses to expand activity more and increase hiring and investment.”

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Estimates of the 73 economists in the Bloomberg survey ranged from 54.5 to 57.5. The non-manufacturing index has averaged 55 this year compared with 54.7 in 2013.

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.

New orders

The ISM’s measure of new orders among non-manufacturing industries surged to 64.9 in July, the highest since August 2005, from 61.2 the prior month. The group’s employment gauge advanced to a six-month high of 56 from 54.4.

The business activity measure, which parallels the ISM’s factory production gauge, increased to 62.4, the strongest reading since February 2011, from 57.5 in June. A measure of prices paid fell to 60.9 from 61.2.

Hilton Worldwide Inc. is among service providers indicating gains in demand will extend into 2015. Hilton reported Aug. 1 that sales climbed to $2.67 billion in the second quarter from $2.38 billion in the same period last year. Net income climbed 24 percent from a year earlier, to 21 cents a share.

“We remain optimistic heading into the back half of the year,” Christopher Nassetta, chief executive officer of the McLean, Va.-based hotel and resort manager, said on an earnings call. “The setup for next year feels terrific – really, really strong.”

Factory optimism

Factories are also growing more upbeat. The ISM’s manufacturing index, released last week, climbed in July to 57.1, the highest since April 2011, from 55.3 a month earlier. Orders and production expanded at their fastest paces of the year, helped by increases in purchases of automobiles and business equipment.

“This is clearly a nice bump,” Bradley Holcomb, the ISM survey chairman, said on a conference call with reporters. “It’s representative of the new orders stream that keeps coming in, and anticipation of more of the same as we go forward.”

Cars and light trucks sold last month at a 16.4 million annualized rate after a 16.9 million pace in June that was the fastest in almost eight years, according to data from Ward’s Automotive Group.

Labor-market gains also are helping spur demand even as wage growth remains sluggish. Employers added 209,000 jobs in July, Labor Department data showed last week. It marked the sixth month of 200,000-plus payroll additions, the longest such period since 1997.

Jobless rate

The improving conditions drew more job seekers into the labor force, pushing the unemployment rate up to 6.2 percent from 6.1 percent a month earlier.

At the same time, the report showed average hourly earnings were little changed at $24.45 in July and increased 2 percent over the previous 12 months.

A dashboard of indicators that Federal Reserve Chair Janet Yellen has said she monitors in order to gauge labor market health shows two-thirds of the measures still short of their pre-recession levels. The share of jobless Americans who have been out of work for 27 weeks or longer and the portion of the working-age population that’s in the labor force are among the underperforming components.

The overall progress has allowed Fed policy makers to further reduce their bond-buying while keeping interest rates at record lows. The Federal Open Market Committee announced last week that it would trim monthly asset purchases by $10 billion, to $25 billion. The central bankers repeated that they’re likely to reduce purchases in “further measured steps” and keep interest rates low for a “considerable time” after ending them.

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