U.S. services sector grows, job losses decline

The U.S. services sector, which represents about 80 percent of U.S. economic activity, grew for the second consecutive month in October, while the labor market also showed signs of improvement in data published on Wednesday.

The U.S. Institute for Supply Management's services index slipped to 50.6 last month from 50.9 in September, below economists' median forecast for a rise to 51.5, with the dividing line between growth and contraction being 50.

Although the report showed growth in the sector, analysts were disappointed in the employment index, which fell to 41.1 in October from 44.3 in September.

It's disappointing that it didn't hit the consensus number but the good news is that the index stayed above 50, said John Canally, economist, with LPL Financial in Boston.

New orders are very strong for two months in a row and inventories are being restocked. The big disappointment is the employment number which dropped as opposed to the manufacturing sector index earlier this week.

The report was roughly in line with surveys in Europe earlier on Wednesday suggesting service sector activity expanded at its fastest in 22 months in October in the euro zone, and in Britain at its briskest since August 2007, when the global credit crunch struck.

LABOR MARKET HURTS LESS

In other U.S. data on Wednesday, private sector companies reduced jobs in October at the slowest pace in more than a year, shedding 203,000 positions, fewer than a revised 227,000 jobs lost in September, according to the ADP Employer Services LLC report.

The October private job loss was the smallest since July 2008.

There are still a lot of people out there feeling pain, said Macroeconomic Advisers' chairman Joel Prakken. But we are heading in the right direction.

The ADP figures are seen by some analysts as a proxy for the government's closely watched report on non-farm payrolls. The U.S. Labor Department will release its October labor report on Friday at 8:30 a.m. EST.

Analysts polled recently by Reuters projected U.S. payrolls likely shrank by 175,000 in October, compared with a 263,000 decline in September.

Economists do not expect job growth to take place until 2010.

We did have a month-on-month improvement in ADP but we are still losing jobs, and the 10 percent unemployment barrier has huge psychological significance, said Michael Woolfolk, senior currency analyst at BNY Mellon in New York.

Still, the pace of private job losses has slowed since the 736,000 drop in March, according to ADP data.

Also on Wednesday a separate report showed planned layoffs by U.S. companies in October slowed for a third consecutive month to a 19-month low, feeding hopes the labor market will continue to improve as economic activity rebounds.

Planned job cuts announced by U.S. employers fell to 55,679 in October, down 16 percent from 66,404 in September, according to the report by global outplacement consultancy Challenger, Gray & Christmas, Inc.

The October job cuts were the lowest since March 2008, when employers said they would shed 53,579 workers, and the October numbers are 51 percent below the year-ago announced layoffs.

For the year through October, announced job cuts are up 36 percent from the prior-year period, at 1.19 million. The total announced layoffs this year are just 31,406 shy of last year's total of 1.22 million.

Planned layoffs in October were driven by the automobile industry, with 13,420 announced layoffs. The sector, with a total of 164,440 planned layoffs this year, may see more downsizing in 2009, the report said.

MORTGAGE RATES FALL

In other U.S. economic data, U.S. mortgage applications rose for the first time in four weeks, reflecting a jump in demand for home refinancing loans as interest rates on 30-year loans dropped below 5 percent, data from an industry group showed on Wednesday.

The Mortgage Bankers Association said rates on 30-year fixed-rate mortgages, the most widely used loan, fell below 5 percent for the first time in four weeks. The 5 percent level is something of a psychological tipping point, typically sparking home loan refinancing activity.

Later on Wednesday the Federal Reserve's policy meeting is expected to reaffirm its intention to keep U.S. interest rates at ultra-low levels for a long time to support the economy, even as signs of recovery accumulate.

The U.S. central bank cut overnight rates close to zero percent last December and it has vowed to keep them there for an extended period. While some analysts think the Fed could start to tip-toe away from that pledge, most say it is too soon.

(Additional reporting by Julie Haviv and Camille Drummond)