U.S. Services Growth Exceeds Expectations in Broad Advance

(Bloomberg) --

U.S. service industries expanded more than forecast in October after tumbling to a three-year low as measures of employment, orders and business activity improved, indicating stable but moderate growth in the biggest part of the economy.

The non-manufacturing index rose to 54.7 from 52.6, an Institute for Supply Management survey showed Tuesday. The reading exceeded the median estimate of 53.5 in a Bloomberg survey of economists. While the figure is close to this year's average, it remains well below the 2018 average, consistent with the slowdown in economic growth.

The reading may help temper concern that the widespread weakness in manufacturing will drag down the rest of the economy. Continued strength in services -- which make up roughly 90% of the economy -- following a report Friday that showed steady job growth will help validate Federal Reserve Chairman Jerome Powell's view that monetary policy is currently in a “good place” after three rate cuts this year.

Thirteen non-manufacturing industries reported expansion in October, while five reported a decrease.

Fourth Quarter

“The last quarter is historically a good month for the non-manufacturing sector so hopefully we'll see this trend continue,” Anthony Nieves, chairman of the group's non-manufacturing business survey committee, said on a call with reporters. He cited holiday shopping and year-end spending. Indications such as low unemployment and solid consumer confidence and spending suggest the trend will continue this year, he said.

The ISM's measure of employment rose to 53.7 in October from a five-year low the month prior, as firms continue to add workers. The rebound in the employment gauge is in line with last week's upbeat jobs report which showed employers added a robust 128,000 employees last month despite special factors shaving more than 60,000 off the headline number.

The ISM's gauge of business activity among non-manufacturers, which parallels the group's measure of factory production, rose to 57 in October from 55.2. Readings above 50 indicate expansion.

Order Gauge

The measure of new orders also improved, increasing to 55.6 from the prior month's 53.7.

A gauge tracking supplier deliveries rose to an eight-month high of 52.5, indicating firmer demand may have led to slower delivery times.

At the same time, the trade war and weakness in global markets continue to affect business. The ISM's gauge of new export orders hit a more than two-year low while the index of imports sank further into contraction.

The group's measure of prices paid by non-manufacturing industries and the gauge of inventories both fell to three-month lows. A measure of order backlogs dropped to the lowest level since December 2016.

Another gauge of service industries from IHS Markit eased in October to the lowest level since February 2016 as export business contracted a third month, according to a separate report Tuesday.

--With assistance from Chris Middleton.

To contact the reporter on this story: Reade Pickert in Washington at epickert@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Vince Golle, Jeff Kearns

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