Service industries are growing slower than forecast

Experts say events of the next few days will impact confidence and sentiment for the rest of the year

Published October 3, 2013 4:05PM (EDT)

Service industries in the U.S. expanded in September at a slower pace than forecast, indicating a pause in the momentum of the biggest part of the economy before the federal government shut down.

The Institute for Supply Management’s non-manufacturing index dropped to 54.4 from the prior month’s 58.6, the biggest decrease since November 2008, the Tempe, Arizona-based group said today. A gauge above 50 shows expansion. The median estimate in a Bloomberg survey of economists was 57.

A recent rise in mortgage rates may be tempering progress in the housing market, while the first government shutdown in 17 years threatens to slow demand for everything from auto purchases to air travel. At the same time, a report this week showing the fastest pace of manufacturing since April 2011 is helping underpin demand for services.

“It’s indicative of moderate expansion,” said Thomas Simons, an economist at Jefferies LLC in New York, whose services index projection of 55 was among the lowest in the Bloomberg survey. “What happens over the next few weeks with the fiscal debate is really going to have an impact on confidence and sentiment for the rest of the year.”

Stocks fell for a second day as investors weighed data showing a decline in a service industries index and data on jobless claims while lawmakers made little progress on ending the federal shutdown. The S&P 500 decreased 0.9 percent to 1,679.26 at 10:36 a.m. in New York.


Since June


The ISM non-manufacturing gauge, which fell to the lowest level since June, is hovering near the 54.7 average since the end of 2011. In August, the measure surged to the highest level since at least January 2008.

“We had such a spike (in August) that with this coming off to these levels, there’s still pretty good indication that there’s still growth going on,” Anthony Nieves, chairman of the survey, said in a call with reporters following the release.

Estimates of the 75 economists in the Bloomberg survey ranged from 55 to 59. The figure includes industries that range from utilities and retail to health care, housing and finance and make up almost 90 percent of the economy.

Another report today showed fewer Americans than forecast filed applications for unemployment benefits last week, indicating U.S. employers were maintaining staff counts in the days leading up to the government shutdown.

Jobless claims rose by 1,000 to 308,000 in the week ended Sept. 28, the Labor Department said in Washington. The median forecast of 50 economists surveyed by Bloomberg called for a rise to 315,000.


Orders Drop


The ISM’s measure of new orders in the service industries decreased to 59.6 in September from 60.5 in August. A gauge of employment at non-manufacturing companies dropped to 52.7, the weakest since May, from 57. Nine industries reported gains in employment, while seven said it fell.

Business activity slumped to 55.1 from 62.2, the report showed. Twelve industries reported increased activity, while five said it decreased.

The ISM’s manufacturing index, released earlier this week, unexpectedly rose to 56.2, the strongest since April 2011, from 55.7 a month earlier, as employment and production measures improved.

Service industries in other parts of the world are showing signs of improvement. Services in the U.K. expanded in September, capping the best quarter for the industries in 16 years. A gauge of activity was at 60.3 after reaching a seven- year high of 60.5 in August, Markit Economics said today in London.

Euro-area services grew more than initially estimated and a Chinese gauge rose to a six-month high, separate reports showed.


Home Building


In the U.S., an increase this year in homebuilding has boosted service providers such as home-improvement retailers, furniture chains and real estate companies. Producers of furniture, appliances and building materials have also benefited.

Further progress depends in part on the outlook for borrowing costs. The rate on 30-year home loans averaged 4.32 percent in the week ended Sept. 26, the lowest in two months. It reached a two-year high of 4.58 percent in the week ended Aug. 22.

Car sales have been another bright spot in the economy. All four of General Motors Co. brands posted double-digit retail sales increases in the third quarter, Kurt McNeil, vice president of U.S. sales, said on an Oct. 1 sales and revenue call.


Government Shutdown


“The recent drop in jobless claims signals that we should see further acceleration in payrolls,” McNeil said. “Add to that an accommodative monetary policy, a recovery in housing markets, low energy prices, and rising household wealth and it’s clear that we should be in good shape going forward.”

At the same time, an extended shutdown of the government poses a risk. The U.S. government furloughed about 800,000 employees and shuttered government offices, national parks and museums after Congress failed to pass a continuing resolution to fund federal operations in the near-term.

“Any type of disruption in government operations would adversely affect government spending, business and consumer confidence, and financial markets,” Jenny Lin, a senior economist at Ford Motor Co., told reporters and analysts.

On this, GM and Ford agreed.

“If this thing drags out a couple of weeks, it starts to have more impact on customer sentiment and it starts to have a bigger impact on business,” said McNeil.


Shutdown Cost


A partial federal shutdown will cost the U.S. at least $300 million a day in lost economic output at the start, according to Lexington, Massachusetts-based IHS Inc. While that’s a fraction of the country’s $15.7 trillion economy, the effects probably will grow over time as consumers and businesses defer purchases and expansion plans.

“Let’s assume that the government shutdown is brief and we sail through the debt ceiling, then I think it matters not much at all,” said Guy Berger, an economist at RBS Securities Inc. in Stamford, Connecticut. “A more realistic case is that the shutdown is a little longer, and the debt ceiling issue, nothing really bad happens, but there’s a lot of volatility that happens.”

--With assistance from Victoria Stilwell and Chris Middleton in Washington. Editor: Vince Golle


To contact the reporter on this story: Jeanna Smialek in Washington at


To contact the editor responsible for this story: Christopher Wellisz at



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Economy Growth Service Industry Unemployment Us Government Shutdown