Service industries in U.S. expand at slowest pace since June

WASHINGTON – Service industries expanded in December at the slowest pace in six months, indicating the biggest part of the U.S. economy cooled as the year drew to a close.

The Institute for Supply Management’s non-manufacturing index fell to 56.2 from a November reading of 59.3 that was the second-strongest since 2005, the Tempe, Ariz.-based group’s report showed today. The average for all of 2014 was the highest in nine years. The median forecast of 75 economists surveyed by Bloomberg called for a December figure of 58.

Gains in consumer spending will probably underpin the service industries that make up almost 90 percent of the economy as global markets struggle to gain momentum. Increased hiring and the cheapest gasoline since 2009 are helping spur sales from auto dealers to apparel retailers.

“Some cooling in services was inevitable after the strong readings we saw earlier,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Penn., who forecast the index would fall to 56.8. “Services industries are on a decent footing coming into this year. The conditions are very supportive for growth.”

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The group’s non-manufacturing survey covers an array of industries including utilities, retailing, and health care, as well as construction and agriculture.

Retailers and accommodation and food service companies topped the list of the 12 non-manufacturing industries that reported growth in December, according to the report. Five sectors contracted.

Factory index

A slowdown to a more sustainable pace of growth was also reflected in the group’s factory survey released last week. The ISM manufacturing index also fell in December to a six-month low as businesses adjusted to weaker overseas markets and some companies delayed orders in anticipation oil prices would fall further.

Readings greater than 50 signal expansion. Bloomberg survey estimates for the ISM services index ranged from 56 to 59.8.

Orders to factories fell in November for a fourth straight month, a Commerce Department report showed today. Bookings for capital equipment declined for a third month as demand eased for metals, appliances and electrical equipment.

Stocks fluctuated after the biggest drop since October in the Standard & Poor’s 500 Index. The S&P 500 lost 0.1 percent to 2,018.54 at 10:59 a.m. in New York.

Today’s ISM report showed the new orders measure declined to 58.9 last month, the lowest since April, from 61.4. The business activity index decreased to 57.2, the weakest since March, from the prior month’s 64.4. The measure parallels the ISM’s factory production gauge.

Prices paid

Cheaper fuel helped drive down the group’s index of prices paid at service providers to 49.5, the first time since September 2009 that more companies reported costs were falling than rising.

The ISM’s employment gauge fell to 56 from 56.7 the prior month.

Service companies in the U.K. also expanded less than forecast in December, adding to signs the economy lost momentum at the end of 2014. London-based Markit Economics said its gauge of purchasing managers fell to 55.8, the lowest since May 2013, from 58.6 in November.

A gauge of euro-area services and manufacturing also signaled slower economic growth in the final quarter of 2014. Markit’s gauge for both industries was 51.4 in December, little changed from 51.1 a month earlier.

Consumer spending

The U.S. expansion, well into its sixth year, is being powered by growth in household purchases. Consumer spending, which accounts for almost 70 percent of the economy, grew at a 3.2 percent pace in the third quarter, according to Commerce Department data. That helped the economy expand at a 5 percent annualized pace, the fastest since the three months ended in September 2003.

More hiring and cheaper gasoline will probably help sustain Americans’ purchases. Monthly payroll gains averaged almost 241,000 from January through November, up from the prior year’s 194,000. The 2.7 million workers added to payrolls are the most since 1999.

A report later this week may show the economy added 240,000 jobs in December after 321,000 a month earlier.

Lower fuel costs are giving Americans extra cash to spend on other goods and services, one reason retailers were able to draw more holiday shoppers during the November-December period.

Carmakers and auto dealerships are also benefiting. General Motors Co., Ford Motor Co. and other major automakers reported rising vehicles sales in the U.S. in December, capping the best year since 2006.

Late 2014

“As we look into 2015, economic indicators remain robust and the fundamentals are poised for a continuation of the momentum we saw in the latter part of 2014,” Emily Kolinski Morris, Ford’s chief economist, told analysts and reporters on a conference call yesterday.

Builders are seeing a mixed picture for the housing market as strict bank lending standards and rising property prices weigh on home sales. At the same time, improving job prospects are slowly bringing ownership within reach of more Americans.

Douglas Yearley, CEO of Toll Brothers Inc., said on a Dec. 10 earnings call that while there are “some signs of pretty significant improvement since the end of the summer,” buyers remain “skittish” and the recovery is going to be “a bit bumpy.”

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