WASHINGTON, Dec 5 (Reuters) – U.S. service industry activity rose unexpectedly in November, providing further evidence of underlying momentum in the economy as employment rebounds and prepares for an expected recession next year.
Monday’s Institute for Supply Management (ISM) survey followed last Friday’s report that the economy continued to add jobs at a solid clip in November as wage growth accelerated. Consumer spending also increased strongly in October.
The strong data flow raises the risk that the Federal Reserve will continue to raise interest rates and push the policy rate higher than the recently forecast 4.6%, where it could stay for some time. The cycle of US central bank rate hikes is the fastest since the 1980s.
“While that’s good news for the growth outlook, it’s not so good that the Fed is trying to curb demand and lower inflation,” said Priscilla Thiagamoorthy, an economist at BMO Capital Markets in Toronto.
The ISM said the non-manufacturing PMI rose to 56.5 last month from 54.4 in October. This was bolstered by business activity rising to an 11-month high. Comments from businesses included “gaining more business” and “demand for our services is increasing”.
Economists polled by Reuters had expected the non-manufacturing PMI to fall to 53.3. A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of US economic activity.
Economists rejected a survey by S&P Global that confirmed its services PMI remained in contraction territory in November.
“We see the overall still strong ISM services as a better indicator of real activity than the lower S&P services PMI,” said Veronica Clark, an economist at Citi Group in New York.
The Fed has raised its policy rate by 375 basis points this year from near zero to a range of 3.75-4.00%.
Thirteen service industries showed growth last month, including construction, health and social care, retail trade, and professional, scientific, and technical services. However, the data reported a decline in wholesale and company management and support services.
Companies in the construction industry reported that “demand for new work is robust.”
Professional, scientific and technical services firms noted that while jobs continued to shrink, growth opportunities remained, with “demand for top talent still high and availability still tight.”
Retailers reported that business was “steady”. Wholesalers said, “Although we are up significantly compared to the same month last year, the volume of business is flat on a month-over-month basis.”
Finding workers remained a problem for transportation and warehousing companies.
Strong economic data boosted optimism that a widely feared recession in 2023 will be short and mild. Some economists even bet that a sharp slowdown in growth could prevent a recession.
The pick-up in activity in the services industry confirms that spending is shifting away from goods and the inflation stick is being shifted to services, suggesting that overall price pressures in the economy may take some time to ease.
The ISM reported last week that manufacturing activity contracted in November for the first time in 2-1/2 years. Economists said the weighted average of services and manufacturing PMIs was consistent with a 2% annual economic growth rate this quarter. The economy grew by 2.9% in the third quarter.
Stocks were trading lower on Wall Street. The dollar rose against a basket of currencies. US Treasury prices fell.
SLOW INFLATION OPENING
But the weakness in manufacturing, which accounts for 11.3% of the US economy, is still not evident in the so-called hard data.
Monday’s Commerce Department report showed factory orders rose 1.0% in October after rising 0.3% in September. Economists had predicted that orders would increase by 0.7%. In October, orders increased by 12.8% year-on-year.
The jump in factory orders in October was driven by a 2.2% increase in orders for transportation equipment, following a 2.3% rise in September. Transport equipment orders were boosted by increased orders for both defense and civil aircraft. Car orders increased by 1.7%.
Car orders increased by 1.5%. There were also significant increases in orders for computers and electronic products, as well as electrical equipment, household appliances and components.
The ISM’s measure of service industry employment rose to 51.5 in November from 49.1 in October. But with orders stagnating, further gains are likely to be limited.
The survey’s measure of new orders received by service enterprises fell to 56.0 from 56.5 in October. Exports fell to their lowest level since April 2020, likely due to slowing global growth and a strong dollar.
As supplies continued to improve, a measure of prices paid for inputs by the service industry fell to 70.0 from 70.7 in October. The survey’s measure of service industry supplier supplies fell to 53.8 from 56.2 in October.
A reading above 50 indicates slower delivery. Businesses continued to stop the backlog of unfinished business.
“While we have seen a respite in goods prices, the slower decline in the larger services sector suggests that it will take time for inflation to return to target and that the Fed still has work to do to combat inflation.” said Shannon Sieri, an economist at Wells Fargo in New York.
Reporting by Lucia Mutikani; Edited by Chizu Nomiyama and Andrea Ricci
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