Service Industries Probably Stabilized: U.S. Economy Preview

Oct. 4 (Bloomberg) -- Service industries in the U.S., the largest share of the economy, probably stabilized in September after contracting for almost a year, economists said before a report this week.

The Institute for Supply Management’s index of non- manufacturing businesses, which reflects almost 90 percent of the economy, rose to 50, according to the median of 64 forecasts in a Bloomberg News survey ahead of figures tomorrow. Fifty is the dividing line between expansion and contraction.

The emerging recovery in manufacturing and housing spurred by government measures such as “cash-for-clunkers” and a tax credit for first-time homebuyers started spreading to the broader economy. Nonetheless, last week’s jobs report showing payroll cuts accelerated in September is a reminder that gains in sales may not be sustained as incentives expire.

“The economy is in a recovery but the recovery in the labor market has lost some steam,” said Zach Pandl, an economist at Nomura Securities International Inc. in New York. “The service sector, while on a sustainable path of growth, is only improving very gradually.”

The projected reading for the Tempe, Arizona-based ISM’s services gauge would be the first break-even point since September 2008, when Lehman Brothers Holdings Inc. filed for bankruptcy. The measure was 48.4 in August.

ISM’s factory index on Oct. 1 showed manufacturing, which accounts for about 12 percent of the economy, expanded less than economists anticipated. The measure fell to 52.6 in September, the first drop this year, from 52.9 in August.

More Job Losses

Job losses accelerated last month and the unemployment rate climbed to the highest level since 1983, Labor Department data showed on Oct. 2. Payrolls fell by 263,000 following a 201,000 decline the prior month, while the jobless rate rose to 9.8 percent from 9.7 percent. The U.S. has lost 7.2 million jobs since the recession began in December 2007.

U.S. stocks fell on Oct. 2, capping the market’s first back-to-back weekly declines since July, as the bigger-than- estimated loss of jobs spurred concern the economy is struggling to recover. The Standard & Poor’s 500 Index retreated 0.5 percent to close at 1,025.21 in New York.

Economic growth next year probably won’t be strong enough to “substantially” bring down the jobless rate, which may remain above 9 percent at the end of 2010, Fed Chairman Ben S. Bernanke told lawmakers on Oct. 1.

Growth Rebound

Recent data signal the economy began growing in the third quarter. Consumer spending, about 70 percent of the economy, jumped in August by the most since October 2001, as the government’s $3 billion cash-for-clunkers incentive to trade in older, less fuel-efficient cars helped auto sales.

Homebuilding, which is included in ISM’s services index, may no longer be a drag on growth as rising sales help trim the glut of properties on the market. The number of contracts to buy previously owned homes rose in August for the seventh straight month, lifted by tax credits for first-time buyers, a report from the National Association of Realtors showed last week.

Service companies seeing a pickup include Carnival Corp., the biggest cruise-line operator. The Miami-based company raised its full-year profit forecast because of better-than- expected ticket bookings.

“Throughout the summer, booking volumes have continued to be quite strong which has enabled us to achieve higher last- minute prices,” Howard Frank, chief operating officer of Carnival, said on a Sept. 22 conference call.

Bigger Trade Gap

A report from the Commerce Department on Oct. 9 may show the trade deficit widened in August to $33 billion from $32 billion in July, the Bloomberg survey shows. Both imports and exports are likely to rise as demand worldwide picks up. Imports may have seen a bigger boost in August as American companies replenished depleted inventories, economists said.

The world economy will expand 3.1 percent next year, the International Monetary Fund said last week, exceeding its July forecast of 2.5 percent. The lender raised the outlook for China, and said developing Asia will grow at more than twice the pace of advanced economies including the U.S., Germany and Japan.

Among other data this week, a Fed report on Oct. 7 may show consumers are borrowing less. Credit fell by $10 billion in August following a record $21.6 billion drop the prior month, according to the Bloomberg survey median.

Bloomberg Survey

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Release Period Prior Median
Indicator Date Value Forecast
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ISM NonManu Index 10/5 Sept. 48.4 50.0
Federal Budget $ Blns 10/7 Sept. 45.7 -80.7
Cons. Credit $ Blns 10/7 Aug. -21.6 -10.0
Initial Claims ,000’s 10/8 26-Sep 551 540
Cont. Claims ,000’s 10/8 19-Sep 6090 6120
Whlsale Inv. MOM% 10/8 Aug. -1.4% -1.0%
ICSC Chain Store Sales 10/8 Sept. -2.0% -1.5%
Trade Balance $ Blns 10/9 Aug. -32.0 -33.0
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