Service industries in the U.S. expanded in July at the fastest pace in five months, complementing a rebound at the nation’s factories and showing the economy is gaining traction.
The Institute for Supply Management’s non-manufacturing index increased to 56, exceeding all forecasts in a Bloomberg survey of economists, from a more than three-year low of 52.2 in June, a report from the Tempe, Arizona-based group showed today.
Enterprises ranging from construction companies to retailers to financial firms reported a pickup in business that signals the expansion is broadening. The figures follow the group’s report last week that showed manufacturing advanced at the fastest rate in more than two years and underscore the Federal Reserve’s forecast for a stronger economy through year-end.
“The pickup in July wasn’t limited to the manufacturing sector,” said Brian Jones, senior U.S. economist at Societe Generale in New York, whose forecast of 55 was the highest in the Bloomberg survey. “We do expect growth to accelerate in the second half of the year. We do think it’s for real.”
Readings above 50 indicate growth in the industries that make up almost 90 percent of the economy. The median forecast of the 75 economists surveyed by Bloomberg was 53.1. Estimates ranged from 51.5 to 55. The non-manufacturing gauge’s 3.8-point gain from June was the biggest since February 2008.
Stocks fell from record highs as investors weighed the data. The Standard & Poor’s 500 Index declined 0.1 percent to 1,707.14 at the close in New York. Treasury securities also dropped, sending the yield on the benchmark 10-year note up to 2.64 percent from 2.60 percent late on Aug. 2.
Another report showed a measure of job prospects climbed in July by the most in five months. The Conference Board’s Employment Trends Index increased 0.4 percent, the biggest gain since February, the New York-based private research group said today. At 112.2, the gauge reached the highest level since June 2008 and was up 4.1 percent from a year earlier.
“With economic activity remaining weak through the second quarter, solid employment growth continues to be a positive surprise,” Gad Levanon, director of macroeconomic research at the Conference Board, said in a statement. “Jobs may grow faster in the coming quarters as the U.S. economy is likely to get stronger towards the end of 2014.”
Service industries in the rest of the world are showing signs of stabilizing. In the U.K., services growth accelerated in July at the fastest pace in more than six years, according to figures today from Markit Economics and the Chartered Institute of Purchasing and Supply.
Euro-area services output shrank at a slower pace than initially estimated, data from Markit Economics showed, while in China, an index of non-manufacturing purchasing managers increased for the first time since March.
Figures last week from the ISM showed manufacturing grew in July as orders and production surged, a sign that companies are growing more optimistic about the economy’s prospects. The index of manufacturing, which accounts for about 12 percent of the economy, jumped to 55.4 from 50.9 in the prior month.
Taken together, the figures underscore the Fed’s takeaway on the world’s largest economy. A composite index of the ISM’s factory and non-manufacturing gauges rose in July to the highest level since February 2011.
“It’s one of the early signs that the pickup in growth that the Fed is expecting in the second half of the year is finally starting to materialize,” said Gennadiy Goldberg, a U.S. strategist at TD Securities Inc. in New York. “It suggests to the Fed that it’s no longer just expectations, that some of these expectations are translating into actual economic activity.”
Policy makers said last week at the conclusion of their two-day meeting that “economic growth will pick up from its recent pace and the unemployment rate will gradually decline.” The Federal Open Market Committee also said it will maintain its $85 billion in monthly bond purchases aimed at stoking the expansion and boosting employment.
Payrolls increased 162,000 in July, while the unemployment rate declined to 7.4 percent, the lowest since December 2008, the Labor Department reported last week.
The ISM non-manufacturing survey’s measure of new orders increased to a five-month high, while its reading of business activity was the strongest this year.
Comments from respondents are “definitely leaning more positive than what we’ve seen in the past few months, so it leads me to believe that we’ll continue to see sustainable growth,” Anthony Nieves, chairman of ISM’s non-manufacturing survey committee, said on a call today with reporters.
Stronger demand is helping push up prices (SPCS20Y%) as well. The index of prices paid climbed to 60.1 from 52.5.
The rebound in home sales and residential construction is feeding through into other parts of the economy. Sales of new homes climbed in June to the highest level in five years. Prices increased in May from a year earlier by the most in more than seven years.
That’s boosting the prospects of companies such as Caesars Entertainment Corp. (CZR:US), which has been coping with gaming industry trends like lower visitation and casino revenues in the second quarter.
“With housing values rebounding, a relatively strong stock market and a modestly improving labor market, we hope to benefit from improving macro trends and consumer sentiment,” Chief Executive Officer Gary Loveman, said in a July 29 conference call. “We believe sustained improvement in the economy, of course, has the potential to translate into higher cap spending at our properties.”
Consumer spending increased in June by the most in four months, Commerce Department data last week showed. After adjusting for inflation, purchases rose 0.1 percent, the same as in the previous month.
Automakers are on pace for their best showing in six years as job gains boost confidence and consumers replace older vehicles. Cars and light trucks sold at a 15.6 million annualized rate in July and 15.9 million the prior month, the strongest back-to-back readings since late 2007, according to figures from Ward’s Automotive Group.
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