Service Industries Expand at Fastest Pace in a Decade
America’s service providers from restaurants to real estate agencies expanded in July at the strongest pace in a decade, putting the U.S. economy on track for faster growth.
The Institute for Supply Management’s non-manufacturing index jumped by 4.3 points to 60.3, the best reading since August 2015 and well above the most optimistic projection in a Bloomberg survey of economists, the group’s report showed Wednesday. All major components of the gauge, including orders and employment, advanced.
Steady hiring, a recovering housing market, reduced fuel expenses and cheap borrowing costs are benefiting service producers while the nation’s factories battle tepid global sales and slower capital spending. Resilient domestic demand helps explain why Federal Reserve policymakers will probably raise interest rates this year for the first time since 2006.
“The economy is in good shape,” Brian Jones, a senior U.S. economist at Societe Generale in New York, said before the report. “The consumer is fine because of the strong labor market. We have the luxury that so much of our activity is determined within our own national borders.”
Readings above 50 for the Tempe, Arizona-based ISM’s index signal expansion. The median forecast in the Bloomberg survey was 56.2 after 56 in June, with estimates ranging from 54 to 58. The survey covers industries that make up almost 90 percent of the economy, including utilities, retailing and health care. It also factors in construction and agriculture.
In contrast, American manufacturers were off to an uninspiring start to the second half of 2015, according to the group’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.
Within the services report, the employment gauge jumped to 59.6 from 52.7, the biggest one-month advance since records began in July 1997. The new orders measure climbed to 63.8 from 58.3. Both measures were the highest since August 2005.
The group’s measure of business activity, which parallels the ISM’s factory production gauge, advanced to 64.9 last month from 61.5. That marked the strongest reading since December 2004.
Demand in the U.S. remains steady. Gross domestic product climbed at a 2.3 percent annualized rate in the second quarter after eking out a 0.6 percent advance in the prior three months, Commerce Department figures showed on July 30. Consumer spending grew 2.9 percent last quarter, also accelerating from the start of the year.
Sustained job creation is driving household purchasing power. A report on Friday may show payrolls 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.
Fed policymakers last month said the job market continues to make strides, keeping them on track to raise their benchmark interest rate.
“Economic activity has been expanding moderately in recent months,” the central bank said in their July 29 policy statement. “The labor market continued to improve, with solid job gains and declining unemployment.
The Fed “anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term,” according to the statement.
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.
D.R. Horton Inc., the largest U.S. homebuilder by revenue, reported fiscal third-quarter earnings that beat analysts’ estimates as the company sold more properties at higher values.
“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, chief executive officer of D.R. Horton, said on a July 28 earnings call with analysts.
