U.S. Services Industry Perks Up; Factory Orders Jump

U.S. services industry activity unexpectedly picked up in November, with employment rebounding, offering more evidence of underlying momentum in the economy as it braces for an anticipated 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 Federal Reserve's fastest rate-hiking cycle since the 1980s as it wages war against inflation is stoking anxiety about an economic downturn.

"This is consistent with the recent consumption data in pointing to decent activity growth in the fourth quarter," said Andrew Hunter, a senior U.S. economist at Capital Economics. "But we suspect that resilience will fade next year, as higher interest rates start to take a bigger toll."

The ISM said its non-manufacturing PMI increased to 56.5 last month from 54.4 in October, which was the lowest reading since May 2020. 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 U.S. economic activity.

Thirteen services industries including construction, healthcare and social assistance, retail trade as well as professional, scientific and technical services reported growth last month. But information, wholesale trade and management of companies and support services reported a decline in activity.

Comments from businesses were fairly upbeat. 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 "stable." Wholesalers said "business volume appears to be leveling 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 flow of solid economic data has raised optimism that the widely feared economic downturn in 2023 would 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. But the weakness in manufacturing, which accounts for 11.3% of the U.S. economy, is not yet evident in the so-called hard data.

A report from the Commerce Department on Monday showed factory orders jumped 1.0% in October after rising 0.3% in September. Economists had forecast orders advancing 0.7%. Orders shot up 12.8% on a year-on-year basis in October.

October's jump in factory orders was driven by a 2.2% rise in bookings for transportation equipment, which followed a 2.3% increase in September. Transportation equipment orders were boosted by increases in orders for both defense and civilian aircraft. Motor vehicle orders rebounded 1.7%.

Orders for machinery rose 1.5%. There were also solid gains in orders for computers and electronic products as well as electrical equipment, appliances and components.

U.S. stocks were trading lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.

In November, the ISM's measure of services industry employment increased to 51.5 from 49.1 in October. But with orders stagnating, further gains are likely to be limited.

The survey's gauge of new orders received by services businesses dipped to 56.0 from 56.5 in October. Exports tumbled, likely because of slowing global growth and a strong dollar.

A measure of prices paid by services industries for inputs slipped to 70.0 from 70.7 in October as supply continued to improve. The survey's measure of services industry supplier deliveries fell to 53.8 from 56.2 in October.

A reading above 50 indicates slower deliveries. Businesses continued to whittle down the backlog of unfinished work.