September 6, 2011 / 2:09 PM / in 7 years

Service sector picks up but jobs still a worry

NEW YORK (Reuters) - The dominant services sector picked up steam unexpectedly last month, snapping a three-month streak of slower growth, though a slower pace of hiring underscored concerns about the broader job market.

The surprise jump in the Institute for Supply Management’s non-manufacturing index was cause for some encouragement, analysts said, as it suggested consumers were holding up better than thought in what appears to be a stalling U.S. economy.

Yet it probably will not be enough to relieve pressure on President Barack Obama to spur more job creation. Obama is due to detail a new jobs plan in a national speech on Thursday.

Last week, government data showed the economy added no new jobs in August, leaving the jobless rate at or above 9 percent for a fifth consecutive month.

“The unexpected rebound (in the ISM report) will help to ease recession fears following last week’s news that payroll employment stagnated,” said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

But he said the ISM reading of 53.3 in August, while up from July’s 17-month low of 52.7, “is consistent with only muted economic growth of about 1.5 percent.”

Economists polled by Reuters had expected a 51.0 reading. A reading above 50 indicates expansion.

While new orders rose, suggesting continued demand, the employment index slipped to 51.6, its lowest since September 2010, underscoring the difficulties facing the roughly 14 million Americans who are out of work.

Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York, said the ISM employment reading is consistent with monthly payrolls growth of about 50,000, well below what is needed to dent the jobless rate.

He also warned that the report is “little more than a lagging indicator of the rate of growth of core retail sales, which have held up well in recent months.”

The services sector accounts for more than two-thirds of the U.S. economy, economists estimate, and is an important source of growth even for some big manufacturers such as Lockheed Martin Corp, the world’s largest defense contractor.

“There are signs that the economy continues to be under stress,” Lockheed Martin Chief Executive Robert Stevens said on Tuesday.

Speaking at the Reuters Aerospace and Defense Summit in Washington, Stevens cited high U.S. unemployment and weak economic growth. But he added, “It’s not clear to me whether that conveys a sense of a double-dip recession.”

The poor U.S. jobs outlook, along with a prolonged debt crisis in Europe, helped spark a stock market sell-off last month that has battered business and consumer confidence.

That has increased pressure on the Obama administration, particularly with the 2012 election just over a year off.

Political clashes over the U.S. budget and debt burden, which led Standard & Poor’s to strip the country of its AAA credit rating, also unnerved investors and consumers alike.

Stocks pared some losses Tuesday after the better-than-expected report but were still down more than 1 percent on rising concerns about the euro zone debt crisis. Buying of safe-haven U.S. government debt only faded slightly after the report.


Firmer growth in the U.S. service sector was at odds with readings from beyond U.S. borders. Data on Monday showed service sector growth slowed sharply in the euro zone, Britain and China, boosting fears of global recession.

If the United States, the world’s largest economy, can keep out of recession, that outlook may improve, analysts said.

Wall Street increasingly expects the Federal Reserve, which already warned it may hold interest rates near zero until 2013, to pour more money into the financial system to boost growth.

“At the margin, (Tuesday’s ISM data is) an argument against any further accommodation at this point, but this doesn’t necessarily countervail the whole bulk of the other data,” said Bill Jordan, economist at Ried Thunberg, a unit of ICAP.

Fed Chairman Ben Bernanke is scheduled to speak in Minnesota on Thursday about the U.S. economic outlook. The Fed’s policy-setting committee will meet September 20-21.

Additional reporting by Mike Miller in Washington and Emily Flitter in New York; Editing by James Dalgleish

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