U.S. Service Industries Grow at Fastest Pace Since October 2015

(Bloomberg) -- American service companies expanded in February at the fastest rate since October 2015 amid stronger orders, signaling momentum in the economy's biggest sector.

The Institute for Supply Management's non-manufacturing index, which covers almost 90 percent of the economy, increased to 57.6 from 56.5 in January, the Tempe, Arizona-based group's data showed Friday. Readings above 50 signal growth. The median forecast in a Bloomberg survey called for the gauge to hold at the previous month's level.

A measure of business activity climbed to the second-highest level since 2005 and order growth quickened, the report showed. Combined with the ISM's latest reading on manufacturing, which grew at the fastest clip since August 2014, the services figures signal widespread optimism about the economy.

“There's confidence out there, there is capital reinvestment happening, there's expansion, there's sales growth,” Anthony Nieves, chairman of the ISM non-manufacturing survey, said on a conference call with reporters. “For the most part, the majority have indicated that there's this positive outlook on the economy and business moving forward.”

The surveys also corroborate recent comments from Federal Reserve policy makers that progress in the economy warrants a paring of monetary accommodation. U.S. central bankers are projected to raise the benchmark interest rate at their next meeting on March 14-15.

New York Fed President William Dudley, in an interview Tuesday on CNN International, said the case for tightening had become “a lot more compelling” in recent months. “The risks to the outlook are now starting to tilt to the upside,” he said.

Economists' Projections

Estimates in the Bloomberg survey of economists for the ISM's non-manufacturing index ranged from 54.5 to 59. The services survey covers an array of industries, including retail, health care, agriculture and construction.

Sixteen of 18 non-manufacturing industries reported growth in February, including mining, support services, and restaurants and hotels.

The group's business activity index, which parallels the ISM's factory production gauge, jumped to 63.6 from 60.3. The February reading was the second-highest since August 2005.

A measure of orders climbed to 61.2 in February, the strongest since August 2015, from 58.6. The gauge of backlogs increased by 4 points to 54, the largest monthly advance in two years. Exports also expanded, after shrinking in January.

An index of services employment increased last month, showing companies also continued to add to headcounts.

The latest ISM gauge of manufacturing increased by 1.7 points to 57.7 in February on the strongest reading for bookings in just over three years. The group's production gauge was the strongest since March 2011.

To contact the reporter on this story: Patricia Laya in Washington at playa2@bloomberg.net.

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