Service industries in U.S. expand at slowest pace since July

Consumer Spending

Household purchases are cooling, reflecting in part the two percentage-point increase in the payroll tax that took effect at the start of this year. Consumer spending, which accounts for about 70% of the economy, climbed 0.2% in March after a 0.7% rise the prior month. The gain was supported by a jump in outlays for services, amid cooler-than-normal temperatures, that is unlikely to be repeated.

The Federal Reserve said this week that it will continue its record monetary policy aimed at boosting growth. The Fed announced it will keep buying bonds at a pace of $85 billion a month and is ready to raise or lower that level as economic conditions evolve.

Bond buying will continue “until the outlook for the labor market has improved substantially,” the Federal Open Market Committee said in a statement released at the conclusion of a two-day meeting in Washington. It also left unchanged its statement that it plans to hold its target interest rate near zero as long as unemployment remains above 6.5% and the outlook for inflation doesn’t exceed 2.5%.

Housing Industry

At the same time, the housing industry has shown further signs of healing since the end of the recession that was triggered by collapse in the mortgage market.

New-home construction climbed to its highest level in almost five years last month. Starts increased 7% to a 1.04 million annual rate, the most since June 2008, from a revised 968,000 pace in February. Sales of new homes rose 1.5% to a 417,000 annual pace in March, completing the strongest quarter since 2008.

More Americans than forecast signed contracts in March to buy previously owned homes, the National Association of Realtors reported earlier this week. The index of pending home sales increased 1.5% after a revised 1% decline the prior month.

Mortgage Rates

Low borrowing costs are attracting buyers who are able to access credit. The average rate on a 30-year fixed mortgage was 3.35% last week, the lowest since the week ended Jan. 3, according to Freddie Mac. Borrowing costs reached 3.31% in November, a record low in data going back to 1972.

Such demand is benefiting homebuilders such as Bloomfield Hills, Michigan-based PulteGroup Inc.

“With five quarters of generally improving market conditions in the rearview mirror, I think it’s safe to say that a sustained recovery in demand for housing is indeed under way,” Richard Dugas Jr., PulteGroup’s chief executive officer, said on an April 25 earnings call.

Bloomberg News

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