U.S. Service Industries Probably Grew at Close to Fastest Pace Since 2005

U.S. Service Industries Probably Grew at Close to Fastest Pace Since 2005

Service industries probably expanded in March at close to the fastest pace since 2005, a sign the U.S. economic expansion is broadening beyond manufacturing, economists said ahead of a report this week.

The Institute for Supply Management’s index of non- manufacturing businesses was little changed at 59.5 after a 59.7 reading the previous month that was the highest since August 2005, according to the median of 53 forecasts in a Bloomberg News survey ahead of the April 5 data. Another report may show first-time filings for unemployment benefits fell last week.

Faster job growth may help sustain household spending against a backdrop of higher food and fuel bills that have damped consumer confidence. Federal Reserve officials said last month the economy is on “firmer footing,” diminishing the need to extend a bond purchase program beyond June.

“The service sector still looks very strong,” said David Semmens, a U.S. economist at Standard Chartered Bank in New York. He said the economic recovery “is more sustainable” because “you are seeing a better pickup with regard to it being driven by the consumer.”

A reading above 50 signals growth for the Tempe, Arizona- based ISM’s measure. The supply managers group reported on April 1 that its manufacturing index expanded last month at close to the fastest pace in almost seven years.

The factory gauge was little changed at 61.2 after a February reading of 61.4 as production rose to the highest level since January 2004. The strength in the industry is generating greater demand for services, which account for almost 90 percent of the economy, benefiting companies such as FedEx Corp. (FDX)

FedEx Benefits
Memphis-based FedEx, which operates the world’s biggest cargo airline, said March 17 that its per-share earnings for the fiscal fourth quarter ending May 31 will be $1.66 to $1.83 a share.

“Our businesses are performing strongly in the United States, where industrial production growth is expected to approach nearly 5 percent in 2011, outpacing GDP and supporting overall transportation volumes,” Fred Smith, chief executive officer of FedEx, said in a teleconference.

The U.S. economy added more jobs than forecast in March and the unemployment rate unexpectedly declined to a two-year low of 8.8 percent, an indication that the labor-market recovery is strengthening, Labor Department figures showed April 1.

Payrolls increased by 216,000 workers last month after a 194,000 gain the prior month. Economists projected a March gain of 190,000, according to the median estimate in a Bloomberg survey. Service providers added 185,000 workers last month, the most since May 2010.

Higher Stocks
Stocks rose last week, adding to gains from the market’s biggest first-quarter rally since 1998, after the jobs report. The Standard & Poor’s 500 Index gained 0.5 percent on April 1 to 1,332.41 at the 4 p.m. close. Both the S&P 500 and the Dow Jones Industrial Average closed at their highest levels since Feb. 18.

Fewer firings are another product of the expanding economy. The number of Americans applying for unemployment insurance fell by 3,000 to 385,000 last week, the lowest level since the end of February, according to the median estimate of economists surveyed by Bloomberg before the April 7 Labor Department report.

Employment gains may help Americans dealing with higher food and gasoline prices. The average cost of a gallon of regular-grade fuel reached $3.62 on March 31, the highest since September 2008, according to AAA.

The central bank, after its latest policy meeting March 15, pledged to continue its program of purchasing $600 billion of bonds before the second half of the year, in order to “promote a stronger pace of economic recovery.” Fed officials also said the economy was on “firmer footing” and acknowledged a rise in commodity prices, signaling deflation risk had diminished and they were unlikely to expand the bond purchase plan.

The Fed will release minutes of the March meeting on April 5.

Bloomberg Survey

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Release Period Prior Median
Indicator Date Value Forecast
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ISM NonManu Index 4/5 March 59.7 59.5
Initial Claims ,000’s 4/7 2-Apr 388 385
Cont. Claims ,000’s 4/7 26-Mar 3714 3700
BCCI 4/7 4-Apr -47 n/a
Cons. Credit $ Blns 4/7 Feb. 5.0 4.8
Whlsale Inv. MOM% 4/8 Feb. 1.0% 1.0%
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source: bloomberg.com