Service industries in the U.S. expanded in March at the slowest pace in seven months as new orders and employment cooled.
The Institute for Supply Management’s non-manufacturing index declined to 54.4 from a one-year high of 56 in February, a report from the Tempe, Arizona-based group showed today. The median forecast in a Bloomberg survey called for a drop to 55.5. A reading above 50 indicates expansion.
The figures follow a decrease in the group’s factory index and signal the economy may find it hard to accelerate this quarter in the face of across-the-board cuts in the federal budget. At the same time, job growth and low borrowing costs may underpin sales at auto dealers and retailers such as Macy’s Inc., while a resurgent housing market benefits realtors, builders and lenders.
“It is a temporary pause after running at a pretty heady clip,” Brian Jones, a senior U.S. economist at Societe Generale in New York, said before the report. Jones, who projected the index would decline to 53.7, had the lowest forecast among economists in the Bloomberg survey. “Consumer spending is going to be fine. The economy will pick back up in the second half.”
Estimates of the 73 economists in the Bloomberg survey ranged from 53.7 to 56.5 for the index, which accounts for almost 90 percent of the economy and includes industries from utilities and retail to health care, housing and finance. Before today, the gauge averaged 53.6 since the recession ended in June 2009.
Another report today showed companies added fewer workers in March than projected. The 158,000 increase in private employment was the smallest since October and followed a revised 237,000 gain the prior month, figures from the Roseland, New Jersey-based ADP Research Institute showed. The median forecast of 39 economists surveyed by Bloomberg called for a 200,000 advance.
The ISM non-manufacturing survey’s employment gauge fell to 53.3 in March from 57.2, the biggest decrease in four years. The measure of new orders declined to 54.6 from 58.2. A gauge of business activity eased to 56.5 from 56.9. The index of prices paid decreased to 55.9 from 61.7.
The ISM’s factory survey on April 1 signaled that manufacturing, which accounts for about 12 percent of the economy, took a breather in March as businesses assessed the impact of the automatic federal government spending cuts, or sequestration, which were triggered as lawmakers failed to reach a compromise on ways to reduce the nation’s debt. The manufacturing index fell to 51.3 from an almost two-year high of 54.2 in February.
For consumers, progress in the labor market is softening the blow from a two percentage-point rise in the payroll tax that went into effect at the start of 2013. Consumer spending, which makes up about 70% of the economy, climbed in February by the most in five months.
Merchants projecting the pace of sales will be sustained include Macy’s, the second-largest U.S. department-store chain. The Cincinnati, Ohio-based retailer said sales at stores open at least a year will rise 3.5% this year, after growing 3.7% in 2012.
“We look at the momentum we have coming into the year and we feel quite confident,” Karen Hoguet, chief financial officer, said at a March 14 conference. “That doesn’t mean that we’re not cognizant of all that’s going on in Washington and what’s gone on with the payroll tax.”
Historically low interest rates are giving housing a leg up. Reports for February showed sales of previously owned properties climbed to the highest level in more than three years, and purchases of new houses capped the best back-to-back months in more than four years.
The average rate on a 30-year fixed mortgage was 3.57% last week, according to data from Freddie Mac. Borrowing costs reached a record low of 3.31% in November.
Auto dealerships may also benefit as demand rises. Motor vehicle sales averaged a 15.26 million annual rate in the first quarter, the best quarterly average in five years, after 14.99 million in the final three months of 2012.
“The economic picture looks pretty similar to the last couple of months, which helps to explain why the industry has stayed in a relatively healthy range,” Kurt McNeil, vice president of U.S. sales operations for General Motors Co., said on an April 2 conference call. “ The housing market continues to recover, business spending has picked up, and pent-up demand for vehicles is offsetting any drag from tax or federal spending issues.”