Service industries in the U.S. expanded in February at the fastest pace in a year, indicating executives of the biggest part of the economy were looking beyond the division in Washington over the nation’s budget.
The Institute for Supply Management’s non-manufacturing index increased to 56 last month from 55.2 in January, the Tempe, Arizona-based group said today. Economists projected the gauge would be little changed at 55, according to the Bloomberg survey median. Readings above 50 signal expansion.
A pickup in the housing market that’s driving sales at companies such as Hovnanian Enterprises Inc., along with sustained consumer purchases, is supporting the service industries that make up almost 90% of the economy. The figures follow a report last week that showed the fastest pace of manufacturing since June 2011, indicating the expansion may be broadening.
“Business spending and investment continues to trend fairly strong despite some apparent consumer income pullbacks,” Guy Lebas, the chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said before the report. “It’s a much more stable outlook.”
Stocks extended gains after the report, with the Standard & Poor’s 500 Index climbing 0.9% to 1,539.59 at 10:29 a.m. in New York.
Estimates in the Bloomberg survey of 73 economists ranged from 50 to 56.3. The index, which includes industries ranging from utilities and retail to health care, housing and finance, has averaged 53.6 since the recession ended in June 2009, before today’s report.
Thirteen non-manufacturing industries, including real estate, transportation, retail trade and finance, reported growth in February, while five said business contracted.
The ISM’s employment gauge was little changed at 57.2 after an almost seven-year high of 57.5 the prior month, today’s report showed. The measure of new orders increased to 58.2 from 54.4. The gauge of business activity advanced to 56.9 from 56.4.
The reading today compares with tempered services growth in the world’s second-biggest economy. China’s services industries expanded in February at the slowest pace since September as a gauge of new orders declined. The non-manufacturing Purchasing Managers’ Index fell to 54.5 from 56.2 the prior month, the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing said on March 2.
Service industries in the U.S. may be benefiting from a rebound in manufacturing. The Institute for Supply Management’s factory gauge rose to 54.2, the highest reading since June 2011, the group reported last week.
Low borrowing costs and stronger property values are supporting demand in the housing market, which is contributing to the expansion.
Purchases of new homes, logged when contracts are signed, jumped in January to a 437,000 annual pace, the strongest since 2008, the Commerce Department reported. Sales of previously- owned houses climbed to a 4.92 million annual rate in January, and the number of available properties slumped to 1.74 million, the lowest level since 1999, the National Association of Realtors said.
Homebuilders such as Hovnanian Enterprises of Red Bank, New Jersey, are projecting further gains for the industry this year.
“Population is up, sentiment about buying homes is up, households are unbundling, creating demand for housing,” Larry Sorsby, executive vice president and chief financial officer, said at a Feb. 26 conference. “Consumer confidence is rising, rents are rising. So people are more anxious to buy today than they were a year ago and we think that trend is going to continue.”
Sustained hiring is also supporting growth. Employers added 157,000 workers in January after a revised 196,000 rise the prior month and a 247,000 surge in November, according to Labor Department data. Revisions added a total of 127,000 jobs in the last two months of 2012. About 160,000 jobs were created in February, according to the Bloomberg survey median before a March 8 report.
Still, higher taxes are crimping consumers’ take-home pay. As part of its budget agreement on Jan. 1, Congress agreed to let the tax used to pay for Social Security benefits return to its 2010 level of 6.2% from 4.2%. That reduces the paycheck for someone who earning $50,000 a year by about $83 a month.
Incomes slumped 3.6% in January, the biggest drop in 20 years, as consumers weathered the higher levy by putting less money in the bank, Commerce Department data showed last week.
Federal Reserve Chairman Ben S. Bernanke has said that while the expansion is gaining traction, the need for a stronger economic recovery outweighs the potential costs in financial markets of continuing unprecedented monetary easing.
“Available information suggests that economic growth has picked up again this year,” Bernanke said last week in testimony to the Senate Banking Committee in Washington.
Still, Bernanke cited an estimate from the nonpartisan Congressional Budget Office that the spending cuts known as sequestration will cause a 0.6 percentage-point reduction in growth this year.
“Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant,” he said.