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.

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