Robust US services sector keeps Fed rate hike in play

Job seekers prepare for career fair to open at Rutgers University in New Brunswick, New Jersey - REUTERS

US private job growth slowed in July, but a surge in services industry activity to a near-decade high suggested solid economic momentum that strengthens the case for a Federal Reserve interest rate hike this year.

The firm domestic fundamentals were underscored by another report on Wednesday showing an increase in imports of food, automobiles, industrial supplies and consumer goods in June.

“This will be interpreted as very good news for the Fed and will be seen as further confirmation of progress towards meeting its growth targets. At this point, we continue to expect the Fed to raise rates at the September meeting,” said Cheng Chen, an economist at TD Securities in New York.

The Institute for Supply Management said its services sector index jumped to 60.3 last month, the highest reading since August 2005, from 56 in June. A reading above 50 indicates expansion in the services sector, which accounts for more than a third of the US economy.

The index was buoyed by a 5.5 point increase in the new orders gauge, which also hit its highest level since August 2005. A measure of service industry employment soared 6.9 points to its highest reading in a decade. Fifteen services industries reported expansion last month, while mining and one other saw a contraction in production.

The ISM survey, however, likely overstates the services sector expansion. Another survey from data firm Markit showed the sector growing moderately in July.

Still, the services sector is helping to offset the drag on the economy from weak manufacturing.

The jump in service sector employment in July also eased concerns on Wednesday of a sharp slowdown in job growth after the ADP National Employment Report showed private employers hired only 185,000 workers last month. Economists had expected a gain of 215,000.

The report, which is jointly developed with Moody’s Analytics, came ahead of the US government’s more comprehensive employment report on Friday. It is, however, not considered a good predictor of nonfarm payrolls.