U.S. service industry growth surges in January according to survey

By Daniel Wagner

AP Business Writer

WASHINGTON (AP) -- U.S. service companies grew at the fastest pace in 11 months in January as companies started hiring to keep up with rising demand.

The Institute for Supply Management said last Friday that its index of non-manufacturing activity jumped to 56.8 percent in January from 53 percent in December. The survey's employment index soared to its highest level since February 2006. Any reading above 50 indicates expansion.

The trade group of purchasing managers surveys businesses including restaurants, hotels, retailers, financial services firms and construction companies. The service sector employs 9 out of 10 U.S. workers.

The service sector has been growing for two straight years. But hiring had stagnated, with the employment index falling below 50 in two of the past four months. Companies overcame their reluctance to hire in January, pushing the employment index up to 57.4 percent from 49.8 percent.

The report echoed the government's strong January employment report, also released last Friday. Service companies added 83,000 jobs last month, according to the Labor Department.

Nearly every component of the ISM index suggested that business for non-manufacturing companies is picking up. Companies said business activity, new orders, exports and imports all picked up. Inventories shrank more quickly, indicating solid sales, and deliveries from suppliers slowed down.

Economists say the service sector received a boost from strong new orders the previous month. In January, new orders grew for the fourth straight month, at the fastest pace since last March.

The report "provides further evidence that the U.S. economy is strengthening," said Paul Dales, senior U.S. economist at Capital Economics, in a note to clients. But he warned that the economic momentum might fade quickly, as it did after strong starts to 2010 and 2011.

"As the unwinding of the previous fiscal stimulus starts to bite and as global demand falters, something similar may be on the cards this year," he said.

The economy grew in the final three months of 2011 at a 2.8 percent annual rate. That was faster than the 1.8 percent pace in the July-September quarter.

Much of the growth came from companies restocking their inventories, a process that was expected to help manufacturers and have a more modest impact on the service industry. That's one reason the ISM's January survey far outpaced economists' expectations.

Economists had expected the overall index to edge up 0.2 percentage points, rather than the 3.8 percentage point leap that the ISM reported, according to a FactSet survey.

Manufacturing grew in January at the fastest pace in seven months, the ISM said last Wednesday. New orders to factories grew, and builders spent more on construction for a fifth straight month.

Service-sector growth had edged up in December after staying flat for three straight months.

Published: Tue, Feb 7, 2012