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.
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.
At the same time, further improvement in the housing industry is helping lift retailers such as Atlanta-based Home Depot, which last month posted first-quarter profit that topped analysts’ estimates and raised its forecast for earnings this year on gains in renovation spending.
“With the housing market there are a lot of positives,” including property values, turnover, household formation and affordability, Francis Blake, chairman and chief executive officer of the largest home-improvement retailer, said at a May 29 conference. “Credit availability is still a major issue and what we’d hope is that over the next half a year, year or so, that that starts to improve and provide some further legs to the housing market recovery.”
The S&P/Case-Shiller index of property values increased 10.9% from March 2012, the biggest 12-month gain since April 2006, after advancing 9.4% in February, a report showed last week.
Purchases of previously owned homes also climbed in April, rising to a 4.97 million pace and the highest level in more than three years, according to the National Association of Realtors.
Borrowing costs are rising from record lows. The average rate on a 30-year fixed mortgage was 3.81% in the week ended May 30 after the biggest jump since February 2011, according to data from Freddie Mac. The rate reached a record low of 3.31% in November in figures dating to 1972.
Uneven improvement in the economy has made it difficult to project when the Federal Reserve may make changes to its unprecedented accommodation program. Chairman Ben S. Bernanke said in a response to questions during congressional testimony on May 22 that the central bank could consider reducing the amount of its monthly purchases of Treasuries and mortgage debt within “the next few meetings” if officials see signs of sustained improvement in the labor market.
The policy-setting Federal Open Market Committee said May 1 that it will keep buying $85 billion a month in bonds to bolster growth and cut unemployment. The central bank also pledged to keep interest rates near zero as long as joblessness is above 6.5 percent and inflation is no more than 2.5 percent.
The unemployment rate was 7.5 percent in April and is forecast to remain at that level when the Labor Department releases figures June 7. The median estimate of economists in the Bloomberg survey projects payrolls increased by 167,000 workers in May compared with the 165,000 gain reported for the previous month. Employment rose an average 207,000 over the six months ended in March.