U.S. Economy: Service Industries Expand by Most Since 2005

Service industries in the U.S. expanded in January at the fastest pace since August 2005, indicating the economic recovery is broadening.
The Institute for Supply Management’s index of non- manufacturing businesses rose to 59.4, exceeding the median forecast in a Bloomberg News survey, after December’s 57.1. Readings above 50 signal expansion in the gauge that covers about 90 percent of the economy. Orders were the highest in seven years, while companies showed more confidence to hire.
Faster growth in household spending and the economy may generate bigger employment gains needed to bring down the jobless rate. Sales climbed 4.4 percent in January, exceeding forecasts, as retailers such as Limited Brands Inc. used promotions to lure shoppers before snowstorms gripped the nation, Retail Metrics Inc. data showed today.
“The consumer will be a source of strength through this year,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “Everything points to more hiring as the expansion goes on.”
Federal Reserve Chairman Ben S. Bernanke said today that the U.S. needs to see faster job growth for a sufficient time before central bankers can be assured the recovery has taken hold.
“Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established,” Bernanke said in a speech at the National Press Club in Washington.
Jobless Claims, Orders
Other reports today showed a decline in first-time jobless claims, a faster pace of productivity and an unexpected increase in orders placed with U.S. factories.
The figures failed to boost stocks, which fell on concern unrest in Egypt will spread through the region. The Standard & Poor’s 500 Index dropped 0.1 percent to 1,302.95 at 1:30 p.m. in New York. Treasury securities also declined, raising the yield on the benchmark 10-year note to 3.52 percent from 3.48 percent late yesterday.
The median projection of 74 economists surveyed by Bloomberg News for the Tempe, Arizona-based services figure was 57.2. Estimates ranged from 54.5 to 62.
Overall, comparable-store sales at retailers at the more than 30 chains tracked by Retail Metrics rose in January for a 17th straight month and topped an estimate of 2.6 percent growth from a year earlier. Seventy percent of retailers beat expectations, Retail Metrics said in an e-mail.
‘More Comfortable’
“We’ve seen modest improvements in the economy, and maybe consumers are feeling more comfortable about their spending,” said Ken Perkins, president of Swampscott, Massachusetts-based Retail Metrics.
The number of Americans filing first-time claims for jobless benefits fell last week, a report from the Labor Department showed today. Applications for unemployment insurance dropped by 42,000 to 415,000 in the week ended Jan. 29. Economists surveyed by Bloomberg projected 420,000 claims, according to the median estimate.
Factory orders rose 0.2 percent in December, led by demand for business equipment, Commerce Department figures showed. Orders for non-defense capital goods excluding aircraft increased 1.9 percent.
Automakers are among those benefiting from income gains and improving credit availability. Car sales in January held at a 12.53 million annual rate, matching December as the best since the government’s cash-for-clunkers program in August 2009, industry data showed. General Motors Co., the largest U.S. automaker, and smaller rival Ford Motor Co. both reported gains.
‘Signs of Progress’
“We do continue to be encouraged by signs of progress in the economy,” Don Johnson, Detroit-based GM’s vice president of U.S. sales operations, said on a conference call on Feb. 1.
The productivity of workers unexpectedly increased at a faster rate in the fourth quarter, the Labor Department also said. The measure of employee output per hour rose at a 2.6 percent annual rate, compared with a revised 2.4 percent gain in the previous three months. Labor expenses declined.
The ISM services survey covers industries that range from utilities and retailing to health care and finance. Today’s report follows the group’s Feb. 1 figures that showed manufacturing unexpectedly accelerated in January at the fastest pace since May 2004 as new orders and employment climbed.
The measure of new non-manufacturing orders increased last month to 64.9, the highest since January 2004. The group’s employment gauge climbed to the highest since May 2006.
“We’re on the right track here,” Anthony Nieves, chairman of the ISM services survey, said in a telephone interview. “It does appear to be sustainable. As consumer confidence has improved, so has business confidence.”
Consumer Spending
As factories continue to power the expansion, other parts of the economy are strengthening. The U.S. grew at a 3.2 percent annual rate in the fourth quarter as consumer spending climbed by the most in more than four years.
AnnTaylor Stores Corp., a New-York based women’s clothing retailer, yesterday raised its fourth-quarter profit forecast, citing a better-than-expected 11 percent gain in sales at stores open at least a year.
Americans have more money to spend following President Barack Obama’s agreement with Congress in December to extend Bush-era tax cuts. The measure also renewed emergency jobless benefits for the long-term unemployed and trimmed payroll taxes.
To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net