U.S. Services Sector Slows in December, Factory Orders Rise

The pace of growth in the services sector slowed for a second straight month in December with business activity expanding at a lower rate and new orders contracting, according to the Institute for Supply Management.

ISM’s index fell to 53 points last month from 53.9 in November, dropping to its lowest reading since June 2013 and under expectations for a read of 54.5.

Separately, financial data firm Markit said its services sector Purchasing Managers Index eased slightly from the prior month, slipping by 0.2 point to 55.7 in the month.

“We think the economy is on track and in recovery mode, and it isn’t unusual to see periodic weak reports,” said David Carter, chief investment officer at Lenox Wealth Advisors in New York. “ISM was a bit weak but the ongoing trend supports an ongoing recovery.”

For both surveys, a reading above 50 indicates expansion. December marked the 48th straight month of growth in ISM’s services index. In addition, ISM’s employment gauge rose to 55.8 from 52.5 in November.

A separate report from the Commerce Department showed new orders for factory goods rebounded in November, rising 1.8 percent, as had been forecast.

The department also said orders for durable goods, manufactured products expected to last three years or more, rose 3.4 percent instead of the 3.5 percent increase reported last month. Durable goods orders excluding transportation rose 1.2 percent as previously reported.

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Storm Slowed Hiring in November, but Services Sector Grew

The ADP National Employment Report, which is closely watched as it comes two days ahead of the government’s monthly national employment report, showed on Wednesday that the private sector added 118,000 jobs during the month, below expectations for a gain of 125,000.

The report largely reinforced economists’ forecast for a weak reading in the Labor Department’s payrolls report on Friday. Economists expect the economy added 93,000 jobs in November, down from 171,000 the month before, according to a Reuters survey.

“It’s close to what the market was expecting. If Friday’s employment report from the U.S. Labor Department comes in similar to this, that would be a good outcome,” said Terry Sheehan, an economic analyst at Stone & McCarthy Research Associates.

Wednesday’s data, which also included better-than-expected factory orders and productivity, presented a mixed picture of the American economy. That was partly a reflection of crosscurrents from the storm, as well as difficult budget negotiations in Washington aimed at averting the so-called fiscal cliff, a series of automatic government spending cuts and tax increases at the beginning of next year.

A report on the American services sector showed a similar slowing in hiring during the month. But forward-looking indicators pointed to faster growth as a rise in new orders and business activity helped offset a slowdown in employment and prices.

The Institute for Supply Management said its services index rose to 54.7 last month from 54.2 the month before. The reading topped economists’ forecasts for growth to 53.5, according to a Reuters survey. In the report, 50 marks the divide between growth and contraction.

“The much larger service side of the U.S. economy remains relatively healthy,” said Joseph Trevisani, chief market strategist at Worldwide Markets. “It has so far avoided the contraction in manufacturing, but worse is probably coming in the first quarter of next year as the economy continues to slow.”

Also on Wednesday, a report showed new orders received by factories unexpectedly rose 0.8 percent in October as demand for motor vehicles and a range of other goods offset a slump in defense and civilian aircraft orders. The Commerce Department also revised October’s figures upward on nonmilitary capital goods orders excluding aircraft in a hopeful sign that the slowdown in business investment in recent months might soon draw to a close.

Economists at Barclays said the strong reading, driven by orders and shipments of capital goods, equipment used to make other things, means the economy will grow faster than expected in the fourth quarter. They raised their gross domestic product growth outlook for the quarter to 2.2 percent from 2 percent.

The Labor Department reported that nonfarm productivity increased at an annual rate of 2.9 percent in the third quarter, a faster clip than initially expected, as businesses held the line on hiring even as output surged, with unit labor costs falling at their fastest pace in almost a year.

With the effects of the storm out of the way in the months ahead, hiring is expected to return to its previous trend even if more slowly than most would like to see with the employment rate still hovering near 8 percent.

Mark Zandi, chief economist of Moody’s Analytics, who helps compile the ADP report, said underlying jobs growth was closer to 150,000 in November after discounting the impact of the storm as well as seasonal jobs brought forward at the start of the holiday season.

“Abstracting from the storm, the job market turned in a good performance during the month,” he said. “Superstorm Sandy wreaked havoc on the job market in November, slicing an estimated 86,000 jobs from payrolls.”