Service industries in U.S. grew at faster pace in February

WASHINGTON – Service industries unexpectedly expanded at a faster pace in February, encouraging companies that make up the biggest part of the U.S. economy to take on more workers.

The Institute for Supply Management’s non-manufacturing index increased to 56.9 from the prior month’s 56.7, the Tempe, Ariz.-based group said Wednesday. A gauge above 50 shows expansion and the median estimate in a Bloomberg survey of economists called for 56.5.

Persistent employment gains and cheaper gasoline are spurring household purchasing power, boosting demand for services at the same time a work slowdown at West Coast ports impeded shipments. Growth in the industries that account for almost 90 percent of the world’s largest economy are a source of support for the expansion as American factories contend with struggling overseas markets.

“The economy has managed to hold up at decent levels of activity despite all these headwinds,” said Jacob Oubina, a senior U.S. economy at RBC Capital Markets LLC in New York, who correctly projected the gain in the ISM gauge. “As these headwinds dissipate, there’s the prospect for a well-north-of- trend economic growth backdrop.”

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Estimates of the 78 economists in the Bloomberg survey ranged from 54.7 to 57.5. The non-manufacturing index averaged 56.3 last year, compared with 54.6 in 2013.

The services survey covers an array of industries including utilities, retailing, health care and finance. It also factors in construction and agriculture. Mirroring the group’s factory survey, more respondents noted delays in shipments caused by a worker slowdown at West Coast ports.

Restaurants, hotels

Restaurants, hotels, wholesalers and real-estate service providers topped the list of the 14 non-manufacturing industries that reported growth in February.

ISM’s measure of employment rebounded in February to 56.4 after slumping in January to 51.6, which was the weakest in almost a year. Wholesalers, retailers, hotels and food-service providers were among the 11 industries reporting increased employment last month. Mining, which includes oil extraction, topped the list of four industries reducing payrolls.

The gauge of new orders among non-manufacturing industries decreased to 56.7 in February, the lowest since March 2014, from 59.5 the prior month.

The business activity measure, which parallels the ISM’s factory production gauge, dropped to 59.4 from 61.5 in January. A measure of prices paid climbed to 49.7 from 45.5 the prior month that was the lowest since July 2009.

Factory gauge

The group’s manufacturing index, released earlier this week, fell in February to 52.9, the lowest since January 2014. A work stoppage at West Coast ports and slower growth abroad limited factory activity, with a measure of orders dropping to the weakest reading since May 2013.

A labor market that’s hitting its stride and a decline in prices at the gas pump since mid-2014 are helping Americans sustain the consumer spending that makes up almost 70 percent of the economy.

Purchases adjusted for inflation rose 0.3 percent in January after falling 0.1 percent the prior month, according to Commerce Department data issued Monday. Sales increased at electronics merchants, restaurants, movie theaters and grocery stores.

Fourth quarter

Household consumption grew at a 4.2 percent annualized rate in the fourth quarter, the most since the last three months of 2010, according to Commerce Department data released last week.

Employers hired 336,330 workers on average in the three months through January, the most since the end of a comparable period in November 1997. The economy probably added about 235,000 jobs in February, according to the Bloomberg survey median ahead of Friday’s report from the Labor Department.

While the nationwide average cost of gasoline has been increasing since the end of January, fuel is still down about $1.25 a gallon from last year’s high in April, according to figures from AAA, the largest U.S. auto group.

The consumer spending data help explain why retailers such as Mooresville, N.C.-based Lowe’s Cos. are upbeat about the outlook for business this year.

“The sharp decline in energy prices should allow consumers to pump less money into their tanks and more into home improvement and other forms of discretionary spending,” CEO Robert Niblock said on a Feb. 25 earnings call. “Jobs, incomes, household financial conditions are expected to continue strengthening in 2015, building on the momentum gained in 2014.”

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