Services in U.S. expand at fastest pace in five months

Service industries in the U.S. expanded in July at the fastest pace in five months, a sign the world’s biggest economy will improve after slowing the last three quarters.

The Institute for Supply Management’s non-manufacturing index increased to 56, exceeding all forecasts in a Bloomberg survey, from a more than three-year low of 52.2 in June, a report from the Tempe, Arizona-based group showed today. The median estimate called for a gain to 53.1. Readings higher than 50 indicate growth in the industries that make up almost 90% of the economy.

The figures follow the group’s report last week that showed manufacturing advanced at the fastest rate in more than two years, indicating the expansion is broadening. The recovery in the housing market and record equity values are bolstering household finances, laying the ground for a pickup in consumer spending on goods and services that account for about 70% of the economy.

“The pickup in July wasn’t limited to the manufacturing sector,” said Brian Jones, senior U.S. economist at Societe Generale in New York, whose forecast of 55 was the highest forecast in the Bloomberg. “Things are picking up going into the third quarter of the year.”

Stocks held losses after the report, with the Standard & Poor’s 500 Index falling 0.2% to 1,706.75 at 10:25 a.m. in New York.

Monthly Increase

The non-manufacturing gauge’s 3.8-point gain from June was the biggest since February 2008. Estimates of the 75 economists in the Bloomberg survey ranged from 51.5 to 55 for the index, which includes industries from utilities and retail to health care, housing and finance. The gauge averaged 53.7 since the recession ended in June 2009.

The ISM non-manufacturing survey’s measure of new orders increased to a five-month high of 57.7 after 50.8. A gauge of business activity rose to 60.4, the highest this year, from 51.7 the prior month.

The employment gauge fell to 53.2 last month from 54.7 in June. The

The index of prices paid climbed to 60.1 from 52.5. A measure of order backlogs decreased in July to 46.5 from 52 in the prior month.

Factory Index

The group’s factory index last week showed manufacturing expanded in July as orders and production surged, a sign that companies are growing more optimistic about the economy’s prospects. The index of manufacturing, which accounts for about 12% of the economy, jumped to 55.4 from 50.9 in the prior month.

Service industries in the rest of the world are showing signs of stabilizing. In the U.K., services growth accelerated in July at the fastest pace in more than six years, according to figures today from Markit Economics and the Chartered Institute of Purchasing and Supply.

Euro-area services output shrank at a slower pace than initially estimated, data from Markit Economics showed, while in China, an index of non-manufacturing purchasing managers increased for the first time since March.

Progress in the labor market and rising home prices are keeping American consumers optimistic as they recover from an increase in the payroll tax that went into effect at the start of the year.

Labor Market

Payrolls increased 162,000 in July, while the unemployment rate declined to 7.4%, the Labor Department reported last week.

Sales of new homes climbed in June to the highest level in five years. Prices increased in May from a year earlier by the most in more than seven years.

That’s boosting the prospects of companies such as Caesars Entertainment Corp., which has been coping with gaming industry trends like lower visitation and casino revenues in the second quarter.

“With housing values rebounding, a relatively strong stock market and a modestly improving labor market, we hope to benefit from improving macro trends and consumer sentiment,” Chief Executive Officer Gary Loveman, said in a July 29 conference call. “We believe sustained improvement in the economy, of course, has the potential to translate into higher cap spending at our properties.”

Consumer spending increased in June by the most in four months, Commerce Department data last week showed. After adjusting for inflation, purchases rose 0.1%, the same as in the previous month.

Automakers are on pace for their best showing in six years as job gains boost confidence and consumers replace older vehicles. Cars and light trucks sold at a 15.6 million annualized rate in July and 15.9 million the prior month, the strongest back-to-back readings since late 2007, according to figures from Ward’s Automotive Group.

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