Service industries in U.S. grow at slower pace than forecast

Service industries in the U.S. expanded at a slower pace than forecast in December as orders contracted for the first time since 2009, showing uneven progress in the biggest part of the economy.

The Institute for Supply Management’s non-manufacturing index decreased to a six-month low of 53 in December from 53.9 in the prior month, a report from the Tempe, Arizona-based group showed today. The median projection in a Bloomberg survey of economists was 54.7. Readings above 50 indicate growth in the industries that make up almost 90% of the economy.

Orders shrank in 11 industries, including real estate, as higher interest rates threatened to slow the pace of home buying that’s been a source of strength for the economy. At the same time, manufacturing expanded last month at the second-fastest rate since 2011, job gains are sustaining household spending and companies have some clarity from Washington after lawmakers reached a budget compromise.

“There’s still a valid question of the impact of rising interest rates on the broader economy -- though housing is still expanding, the pace of growth is decelerating,” Russell Price, senior economist at Ameriprise Financial Inc. in Detroit, said before the report. Even so, “the economy is clearly gaining momentum. It’s not the first time in this recovery that we’ve seen that, but this time, it seems that there are less headwinds that could derail the momentum.”

Economists’ Forecasts

Estimates in the Bloomberg survey of 69 economists ranged from 53 to 57.7. The group’s measure includes industries that range from utilities and retail to health care, housing and finance. The non-manufacturing index averaged 54.7 last year, compared with 54.6 in 2012 and the strongest reading since 2006.

Stocks fluctuated after the services report and another that showed factory orders climbed in November. The Standard & Poor’s 500 Index rose 0.1% to 1,833.49 at 10:23 a.m. in New York.

Orders placed with U.S. manufacturers increased 1.8% in November after a 0.5% decline a month earlier that was smaller than initially reported, Commerce Department data showed today.

The ISM’s measure of new orders in the service industries decreased to 49.4 last month, the lowest since May 2009, from 56.4 in November. Among industries other than real estate reporting declining demand were mining, transportation and warehousing, food services and entertainment and recreation. Six industries reported growth in orders, including retail trade, construction and finance.

Employment Gains

A gauge of employment in non-manufacturing industries rose to 55.8 from a six-month low of 52.5 in November. Business activity eased to 55.2 from 55.5, the report showed.

The ISM’s manufacturing index, issued Jan. 2, eased to 57 in December from 57.3 a month earlier, which was the highest level since April 2011. Measures of orders and employment advanced, with the latter reaching its highest level since June 2011.

Motor vehicle dealers were among those benefiting from stronger auto sales in 2013. U.S. auto sales increased 7.6% last year to 15.6 million, the best for the industry since 2007, even as December purchases fell short of analysts’ estimates, rising 0.3% to 1.36 million, according to Autodata Corp. Cold weather may have kept buyers from dealers’ lots.

 Housing Recovery

The housing recovery has also been a bright spot for the economy, creating jobs and driving demand for home-related goods. Construction spending climbed 1% in November, the Commerce Department said last week, with outlays reaching the highest point since March 2009. Though rising mortgage rates have slowed the pace of purchasing, a lack of inventory is keeping builders busy.

“The fundamental drivers of a housing recovery remain in place, although conditions are not as favorable as they were six months ago,” said Jeffrey T. Mezger, chief executive officer at Los Angeles-based KB Home, in a Dec. 19 earnings call. “Resale inventory levels have been slowly increasing but still remain low by historical standards. Affordability is at attractive levels, demographics remain strong and there’s pent-up demand due to delayed household formation.”

Fed’s Bernanke

Federal Reserve Chairman Ben S. Bernanke said in a Jan. 3 speech in Philadelphia that the headwinds that have held back the economy may be abating.

“The combination of financial healing, greater balance in the housing market, less fiscal restraint, and, of course, continued monetary policy accommodation bodes well for U.S. economic growth in coming quarters,” he said in prepared remarks.

A stronger economy and improvement in the labor market prompted the Fed to dial back its bond-buying program aimed at bolstering the expansion. The central bank announced in December that it would reduce its monthly purchases to $75 billion from $85 billion.

December employment data, due out at the end of this week, is projected to show the job market sustained momentum. The median forecast in a Bloomberg survey calls for a 195,000 increase in payrolls.

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