Fastest services growth since 2005 propels U.S. GDP

Service industries in the U.S. expanded in August at the fastest pace in almost eight years as a pickup in demand encouraged companies to step up hiring, showing the world’s biggest economy is gaining momentum.

The Institute for Supply Management’s non-manufacturing index increased to 58.6 from 56 the prior month, the Tempe, Arizona-based group said today. The August figure, which exceeded the median forecast of 55, was the strongest since December 2005, according to data compiled by Bloomberg. The ISM’s measure of orders rose to the highest since February 2011.

“It’s certainly an encouraging sign,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “We’ve seen recently pretty good job gains and I think the employment indices and these surveys suggest that’s going to continue.”

Other data today showed claims for unemployment benefits declined more than forecast last week and companies expanded payrolls in August. Treasury yields rose to the highest in two years on expectations that a report tomorrow will show enough job-market strength to allow the Federal Reserve to start paring the monthly pace of bond purchases at its Sept. 17-18 meeting.

The unexpected acceleration in growth among service companies, combined with the ISM’s report earlier this week showing the fastest pace of manufacturing since June 2011, shows the housing recovery and stronger car sales are reverberating through the economy.

More Momentum

“The economy is picking up some momentum,” said David Sloan, senior economist at 4Cast Inc. in New York. “The general improvement in the economy and employment growth provides income growth, and that feeds on itself.”

A report from the ADP Research Institute in Roseland, New Jersey, showed companies added 176,000 workers to their payrolls in August, in line with the average over the last two years, after a 198,000 increase a month earlier.

Jobless claims in the week ended Aug. 31 declined by 9,000 to 323,000, the Labor Department said. The four-week average dropped to the lowest since October 2007.

Treasuries fell, pushing up the yield on the benchmark 10- year Treasury note to 2.98% from 2.90% late yesterday. The Standard & Poor’s 500 Index rose 0.2% to 1,656.11 at 3:30 p.m. in New York.

Europe’s Economy

As the U.S. shows signs of picking up, Europe’s economy is emerging from a recession. German factory orders rose 2% in July from a year ago, the Economy Ministry in Berlin said today. Bookings dropped from the previous month, when demand was boosted by the Paris Air Show.

Estimates of the 78 economists in the Bloomberg survey for the ISM services figure ranged from 53.5 to 57.5, which includes industries from utilities and retail to health care, housing and finance. Readings above 50 indicate growth in the industries that make up almost 90% of the economy.

The group’s measure of new orders increased to 60.5 in August from 57.7 the month earlier. A gauge of employment in non-manufacturing industries advanced in August to a six-month high.

Data tomorrow from the Labor Department may show employers stepped up the pace of hiring in August, taking on 180,000 workers after adding 162,000 a month earlier, according to the median forecast in a Bloomberg survey.

Lowe’s Cos.

Among non-manufacturing industries in the U.S., home- improvement retailers are enjoying increased sales as the housing market rebounds. Robert Niblock, chief executive officer of Mooresville, North Carolina-based Lowe’s Cos., said the market’s growth depends on how much higher mortgage rates affect Americans’ buying decisions.

The average rate on a 30-year fixed mortgage climbed to a two-year high of 4.58% on Aug. 22 after reaching a recent low in May of 3.35%, data from Freddie Mac show.

“The stronger-than-expected pace of home-improvement industry growth so far this year was fed by modestly stronger gains in housing turnover and job growth than originally forecast,” Niblock said on an Aug. 21 conference call.

Higher mortgage rates, ‘shouldn’t derail it as long as job gains persist, homes continue to appreciate, and rates rise more gradually going forward,” he said.

Job gains and cheaper financing by some automakers are helping car dealers stay busy. Cars and light trucks sold last month at a 16 million annualized rate, the fastest since October 2007, according to Ward’s Automotive Group data.

General Motors Co. recorded its best month since 2008 and Ford Motor Co. its strongest month of retail sales since 2006. Chrysler Group LLC sales rose for the 41st straight month.

Americans spending more on cars and housing helped the economy maintain a “modest to moderate” pace of expansion from early July through late August, even as borrowing costs increased, the Fed said yesterday.

“Consumer spending rose in most districts, reflecting, in part, strong demand for automobiles and housing-related goods,” the Fed said. “Residential real estate activity increased moderately in most districts, and demand for nonresidential real estate gained overall.”

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