Strong U.S. services sector data buoys economic outlook

WASHINGTON (Reuters) - The U.S. services sector expanded in April as new orders and employment accelerated, bolstering views that economic growth would rebound after almost stalling in the first quarter.

David Wallace (L) of Lockheed Martin interviews an applicant at a job fair for veterans and their spouses held by the U.S. Chamber of Commerce and the Washington Nationals baseball club at Nationals Park in Washington December 5, 2012. REUTERS/Gary Cameron

The growth outlook was, however, dimmed by another report on Wednesday showing private employers hired the fewest number of workers in three years in April.

Economists say strong services industry activity together with a rebound in automobile sales in April reported on Tuesday, underscore the economy’s firm fundamentals that could keep the Federal Reserve on track to raise interest rates twice this year.

“The earliest indications point to a solid growth rebound of the U.S. economy in the second quarter. If Friday’s payrolls report corroborates that trend, a June rate hike certainly remains an option,” said Harm Bandholz, chief economist at UniCredit Research in New York.

The Institute for Supply Management said its nonmanufacturing index rose 1.2 percentage points to a reading of 55.7 in April, with the majority of industries expressing optimism about the business climate and the economy.

A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of the U.S. economy. Services industry activity was last month buoyed by a 3.2 percentage point surge in new orders.

A gauge of services sector employment rose to 53.0 last month from a reading of 50.3 in March. Construction firms reported “severe” shortages of unskilled labor.

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Companies in the energy sector said recent oil price increases had slightly improved the outlook for the industry, but the gains had not been enough to initiate hiring or spending.

The rise in services sector employment last month eclipsed the slightly weak ADP National Employment Report, which showed private payrolls increased 156,000 last month, the smallest gain since April 2013, after rising 194,000 in March.

The step-down in private sector hiring is at odds with other labor market indicators, such as first-time applications for unemployment benefits, which are near four-decade lows. The Conference Board’s consumer confidence survey last week also painted an upbeat picture of the jobs market.

“We don’t see the ADP employment report as reliable as the weekly jobless claims report. We put more faith in the initial claims report,” said Jesse Hurwitz, an economist at Barclays in New York.

The services industry data and the ADP report, which is jointly developed with Moody’s Analytics, came ahead of the government’s more comprehensive employment report for April scheduled for release on Friday.

According to a Reuters survey of economists, nonfarm payrolls likely increased by 202,000 jobs in April after rising 215,000 in March. The unemployment rate is forecast holding steady at 5.0 percent.

The labor market has so far weathered the sluggish economy, which has been slammed by weak exports as a result of the lingering effects of the dollar’s rally last year and tepid global demand.

Growth has also been eroded by relentless aggressive spending cuts in the energy sector in the aftermath of last year’s plunge in oil prices, as well as efforts by businesses to reduce an inventory overhang.

The government reported last week that the economy slowed to an annual growth pace of 0.5 percent in the first quarter after expanding at a 1.4 percent rate in the fourth quarter.

But economists expect the soft first-quarter GDP growth would be revised to at least a 0.9 percent pace later this month after a third report from the Commerce Department showed a strong increase in factory orders in March.

The dollar rose against a basket of currencies, rebounding from a more than 15-month low touched on Tuesday. Prices for U.S. government debt rose slightly, while U.S. stocks fell.

In another report, the Commerce Department said the trade deficit fell 13.9 percent to $40.4 billion in March, the smallest since February 2015, as imports of goods plunged to a more than five-year low.

Weak imports potentially signal slackening domestic demand, but could also be related to the ongoing inventory drawdown. Lower oil prices and increased domestic energy production are also helping to keep the import bill in check.

Imports of goods tumbled 4.3 percent to $175.3 billion, the smallest since December 2010. Imports were held down by industrial supplies and materials, which fell to a near 12-year low. Petroleum imports were the lowest since September 2002, even as oil prices rose to an average $27.68 per barrel.

Exports of goods also fell last month, slipping 1.6 percent to $116.8 billion. Exports of food were the lowest since September 2010. Industrial supplies and materials exports fell to a six-year low, while consumer goods exports were the lowest since March 2013.

But there are signs that some of the export drag is starting to fade. The Institute for Supply Management reported on Monday that a gauge of export orders received by U.S. manufacturers rose in April for a second straight month, reaching its highest level since November 2014.

In a fifth report, the Labor Department said productivity, which measures hourly output per worker, declined at a 1.0 percent rate in the first quarter after shrinking at a 1.7 percent pace in the fourth quarter.

Weak productivity helps explain the divergence between lackluster economic growth and the fairly robust labor market.

Reporting By Lucia Mutikani; Editing by Andrea Ricci