Good feeling: People walk through a shopping district in Manhattan, New York. The American economy grew at a 2.9% rate in the third quarter and now some economists are even betting that a recession can be avoided. — AFP
WASHINGTON: Service industry activity in the United States unexpectedly increased in November, with employment rebounding, providing more evidence of underlying momentum in the economy as it prepares for an expected recession next year.
The survey from the Institute for Supply Management (ISM) on Monday followed on the heels of news last Friday that the economy continued to create jobs at a solid clip in November, with wage growth accelerating. Consumer spending also rose strongly in October.
The flow of strong data raises the risk that the Federal Reserve (Fed) will continue hiking interest rates and lift its policy rate to a higher level than the recently projected 4.6%, where it could stay for some time.
The US central bank’s rate-hiking cycle is the fastest since the 1980s.
“While that’s good news for the growth outlook, it’s not so great for the Fed trying to dampen demand and ease inflation,” Priscilla Thiagamoorthy, an economist at BMO Capital Markets in Toronto, said of the data.
The ISM said its non-manufacturing purchasing managers index (PMI) increased to 56.5 last month from 54.4 in October.
It was boosted by a surge in business activity to an 11-month high.
Comments from businesses included “gaining more business” and “demand for our services is increasing.”
Economists polled by Reuters had forecast the non-manufacturing PMI slipping to 53.3. A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of US economic activity.
Economists shrugged off a survey from S&P Global confirming its services PMI was stuck in contraction territory in November.
“We see overall still-strong ISM services as a better indicator of real activity than the much lower S&P services PMI,” said Veronica Clark, an economist at Citigroup in New York.
The Fed has raised its policy rate by 375 basis points this year from near zero to a 3.75% to 4% range.
Thirteen service industries, including construction, healthcare and social assistance, retail trade, and professional, scientific and technical services, reported growth last month. But information, wholesale trade and management of companies and support services reported a decline.
Companies in the construction industry reported that “new business requests are solid.”
Professional, scientific and technical services firms noted that though job openings continued to decrease, opportunity for growth remained “with demand for top talent still high and availability still rather scarce.”
Retailers reported business as “solid.” Wholesalers said “business volume appears to be levelling out based on a month-over-month comparison, although we are up significantly when compared to the same month last year.”
Finding workers remained a challenge for transportation and warehousing companies.
The solid economic data have raised optimism that the widely feared economic downturn in 2023 will be short and mild. Some economists are even betting that a recession could be avoided, with growth just slowing sharply.
The acceleration in services industry activity confirms that spending is shifting away from goods and that the inflation baton has been handed over to services, indicating that overall price pressures in the economy could take a while to subside.
Manufacturing activity contracted in November for the first time in 2-1/2 years, the ISM reported last week. Economists said a weighted average of the services and manufacturing PMIs was consistent with a 2% annualised economic growth pace this quarter. The economy grew at a 2.9% rate in the third quarter. — Reuters
