Sizzling service demand points to stronger U.S. economic growth

WASHINGTON – America’s service providers from retailers to real estate agencies sizzled in July.

The industries that make up almost 90 percent of the economy expanded at the fastest pace in a decade, the Institute for Supply Management said Wednesday. The broad-based pickup was accompanied by a flurry of orders, prodding more companies to beef up staffing levels.

Increasing hiring, reduced fuel expenses and cheap borrowing costs are sparking demand, making up for the malaise in manufacturing. Resilient domestic sales help explain why Federal Reserve policy makers will probably raise interest rates this year for the first time since 2006.

“It shows a good, solid pace of activity,” said Michael Moran, chief economist at Daiwa Capital Markets America Inc. in New York. “Consumers are doing fairly well, and housing is starting to do better. We’ve got a good job market in place. We should get stronger results for second-half economic growth.”

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The ISM’s non-manufacturing index jumped by 4.3 points to 60.3, the highest since August 2005 and exceeding the most optimistic projection in a Bloomberg survey of economists. Readings above 50 signal expansion.

The median forecast was 56.2 after a 56 reading a month earlier, with estimates ranging from 54 to 58. It marked the gauge’s biggest positive surprise since February 2012.

While it is “a bit unusual” to see such elevated readings at this time of the year, “all indications are that we should see growth continue,” Anthony Nieves, the ISM’s survey chairman, said on a conference call with reporters after the release. The service sector “is having a nice uptick.”

Industries expanding

Entertainment and recreation, real estate, and retail led the list of 15 industries reporting expansion in July. Mining, which includes oil and gas well drilling, was among the two that contracted.

In contrast, American manufacturers were off to an uninspiring start to the second half of 2015, according to ISM’s survey released on Monday. The factory index dropped in July to a three-month low of 52.7.

The 7.6 point difference between the ISM’s non- manufacturing gauge and the factory index was the biggest since January 2009, six months before the last recession ended.

The same headwinds facing manufacturers – weaker global economies and a stronger dollar – were also evident in Commerce Department figures issued Wednesday. The trade gap widened 7.1 percent in June to $43.8 billion, the largest in three months. Exports were little changed, while imports climbed.

More orders

The ISM’s data also showed the gauge of service-industry orders climbed to the highest level since August 2005. A measure of business activity was the strongest since December 2004.

The share of services companies boosting employment was the highest since records began in 1997.

In contrast, a report Wednesday from ADP Research Institute indicated a slower pace of hiring. It said 185,000 workers were added to payrolls in July, the fewest in three months and weaker than the most pessimistic forecast in a Bloomberg survey, after a 229,000 gain. Factory employment cooled.

Most economists maintained their forecast for Friday’s jobs report after the ADP figures. Payrolls probably rose by about 225,000 in July, while the unemployment rate held at a seven-year low of 5.3 percent, according to the Bloomberg survey.

Housing recovery

The recovery in housing – part of the ISM’s universe of non-manufacturing industries – is in full swing as job growth and mortgage costs close to multiyear lows stoke demand and spur construction.

Conditions are better for Realtors as a recent report showed purchases of previously owned homes climbed in June to an eight-year high. Builders are also enjoying better times, breaking ground on new houses in June at the second-fastest pace since November 2007.

“We just see general, solid markets across the country, nothing is exploding, but everything seems to be getting a little better on a month-to-month basis, quarter-to-quarter basis,” David Auld, CEO of D.R. Horton Inc., the largest U.S. homebuilder by revenue, said on a July 28 earnings call with analysts.

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