Service industries in U.S. expanded at a faster pace in May

Service industries in the U.S. expanded at a faster pace in May, indicating the world’s largest economy is weathering a downturn in manufacturing and federal budget cuts.

The Institute for Supply Management’s non-manufacturing index climbed to 53.7 last month from 53.1 in April, a report from the Tempe, Arizona-based group showed today. The median forecast in a Bloomberg survey called for a rise to 53.5. A reading above 50 indicates expansion in the industries that make up almost 90 percent of the economy.

A rebound in housing that is helping bolster consumer confidence is reverberating through the rest of the economy and benefiting companies such as Home Depot Inc. Even faster growth will require bigger gains in employment and wages that will help households cope with an increase in the payroll tax.

“Housing is a key link to the broader picture, and that’ll definitely contribute to support,” Sean Incremona, a senior economist with 4Cast Inc. in New York, said before the report. “We’re chugging along in a moderate recovery.”

Estimates of the 74 economists in the Bloomberg survey ranged from 51 to 55 for the services index, which includes industries from utilities and retail to health care, housing and finance. The gauge has averaged 53.6 since the expansion began in June 2009.

Another report today showed companies added fewer workers than forecast in May. The 135,000 increase followed a revised 113,000 gain in April that was smaller than initially estimated, according to figures from the Roseland, New Jersey-based ADP Research Institute.

Orders Climb

The ISM non-manufacturing survey’s measure of new orders increased to a three-month high of 56 in May after 54.5 a month earlier. A gauge of business activity improved to 56.5 from 55. The employment gauge declined to 50.1, the weakest since July, from 52.

The ISM’s factory index earlier this week showed manufacturing, which accounts for about 12% of the economy, unexpectedly contracted in May, registering its lowest reading since June 2009. The gauge fell to 49 from the prior month’s 50.7, the third consecutive decline.

Consumer spending in the U.S. unexpectedly declined in April for the first time in almost a year as incomes stagnated, Commerce Department data showed last week. Purchases fell 0.2% after a 0.1% gain in March that was smaller than previously estimated.

The drop shows a weakening at the start of the second quarter from the first three months of the year, when the household purchases that account for about 70% of the economy expanded 3.4%. That was the biggest gain since the last three months of 2010 and showed consumers were weathering tax increases at the start of the year.

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