US Service Sector Rebounds in October Activity in the US service sector jumped unexpectedly in October, a welcome sign of sustained growth in the world's largest economy in the year's final quarter, a survey showed Tuesday
The rebound in the Institute for Supply Management survey reversed the decline seen in September, when a three-year low exacerbated recession fears.
The closely watched index jumped 2.1 points to 54.7 percent, handily surpassing forecasts. Any reading above 50 indicates growth.
The increase in the index also underscored the growing divide between America's dominant service economy and its manufacturing sector, which ISM says has now been contracting for three straight months as global trade slows.
Within the report, an index for hiring also rose after a frighteningly low reading in September -- a signal that jibes with the strong October job creation reported by the federal governent.
"I think looking at this for the fourth quarter bodes well for the non-manufacturing sector," Anthony Nieves, the survey's chairman, told reporters.
The October-December period is normally strong, as companies and consumers bump up spending at the year's end, he said.
"The headwinds we have are the obvious with the trade war but there's been some progress made on that front so that's also helping the commercial, corporate psyche," he said.
The index is still well below highs seen at the end of last year.
Thirteen industries -- including agriculture, utilities, professional services, transportation and real estate -- posted growth.
Five others, such as wholesalers, retailers and mining, which includes oil producers, contracted.
"Business remains brisk and well ahead of last year to date, as we near the peak of our busiest season," a survey respondent in the real estate, rental and leasing industry told ISM.
"Looking ahead, our customers remain upbeat about their business well into next year."
Ian Shepherdson of Pantheon Macroeconomics said the improvement was welcome but did not likely point to a sustained rebound.
"Under normal conditions we'd expect the index to be in the 58-to-59 range, given the hefty increases in core retail sales in recent months," he said in a note to clients.
But given that consumer tariffs on Chinese imports remain in place, retail sales are not likely to lift the ISM services index much higher, according to Shepherdson.
US Economic Growth Surprisingly Solid Despite Trade Disputes By Douglas Gillison
The American economy slowed a touch in the third quarter but remained solid, thanks to a pickup in home sales and steady consumer spending, according to official data released Wednesday.
GDP growth avoided the steeper drop-off feared by economists but the US-China trade war still walloped the business sector, according to Commerce Department data.
As he seeks to deescalate a damaging trade war, the steady expansion offered President Donald Trump a measure of breathing room. His economic agenda so far has failed to produce the sustained annual three percent growth he vowed to achieve on taking office.
The economy expanded 1.9 percent in the July-September period, well above economists' expectations but a notch lower than the 2.0 percent growth seen in the second quarter.
The result, which is subject to revision, muddies the waters a bit for the US Federal Reserve, which later Wednesday is expected to announce a third consecutive interest rate cut in the effort to buoy the economy amid the uncertainty caused by Trump's trade wars.
"The Greatest Economy in American History!" Trump tweeted an hour before the data was released.
But while the White House may breathe a sigh of relief, the details also offered a few reasons to worry.
Rattled by the uncertainty of Trump's trade wars and a global economic slowdown, business investment tumbled the most in nearly four years, according to the report.
And the decline in investments in structures -- stores, offices, factories and hotels -- accelerated, posting the second straight double-digit drop.
Consumer spending, a mainstay of the economy, remained solid but slowed ahead of the holiday season, with spending on durable goods like autos and computers was cut nearly in half, the data showed.
The housing sector, meanwhile, was a bright spot.
- Housing, exports boost growth -
After dragging on the economy for a year and a half, spending on new and existing homes jumped higher as would-be home owners pounced on attractive mortgage rates in recent months in the wake of the Fed rate cuts.
Exports also recovered slightly, posting a modest increase and adding somewhat to growth after tumbling in the second quarter.
A slowing global economy has hit foreign demand for US goods and services, raising fears the world's troubles could wash up on US shores.
While the quarterly report was not as bad as economists feared, it did confirm a slowdown is underway.
Annual GDP growth slowed to 2.0 percent from 2.3 percent in the second quarter, the second straight slowdown and the slowest pace of Trump's presidency.
As the growth has slowed, the Fed has rolled back some of the increases in the benchmark lending rate that were implemented last year when the economy was strengthening, but if GDP holds up it makes the decision on the next step more complex.
A minority of voices among Fed policymakers say the slowdown this year is merely the economy cooling back to a more normal pace as the boost from tax cuts and fiscal stimulus fades, which reduces the need for more stimulus.
And a key measure of inflation in the GDP report -- personal expenditure prices excluding food and fuel -- surpassed the Fed's two percent target, rising to 2.2 percent the highest level since the start of 2018.
Accelerating inflation will reinforce the arguments of Fed hawks who oppose further rate cuts but it is unlikely to silence Trump's loud demands for stimulus from the central bank.
Some analysts continue to think the economy is poised to weaken further, but others caution that special factors may be exaggerating the worrisome signs.
"In short, growth has slowed, but it is still not especially weak," said economist Jim O'Sullivan of High Frequency Economics.
"The drop in business investment in equipment is attention-grabbing but weakness is being exaggerated by Boeing’s problems."
The US aviation giant has slowed production of its formerly top-selling 737 MAX jets, which have been grounded worldwide following deadly crashes.
Wall Street was flat after the GDP data release as investors held their fire before the Fed's announcement.
A measure of hiring by U.S. companies has fallen to a seven-year low and fewer employers are raising pay, a business survey has found.
Just one-fifth of the economists surveyed by the National Association for Business Economics said their companies have hired additional workers in the past three months. That is down from one-third in July. Job totals were unchanged at 69% of companies, up from 57% in July. A broad measure of job gains in the survey fell to its lowest level since October 2012.
The hiring slowdown comes as more businesses are reporting slower growth of sales and profits. Business economists also expect the economy's growth to slow in the coming year, partly because tariffs have raised prices and cut into sales for many firms.
``The U.S. economy appears to be slowing, and respondents expect still slower growth over the next 12 months,'' said Constance Hunter, NABE president and chief economist at the accounting firm KPMG.
Perhaps because of concerns over a weakening economy, businesses are less likely to offer higher pay, even with unemployment at a 50-year low. Just one-third of economists said their firms had lifted pay in the past three months, down from more than half a year ago.
Companies are also cutting back on their investments in machinery, computers, and other equipment. The proportion of firms increasing their spending on such goods is at its lowest level in five years, the survey found.
Sales are also growing more slowly. Just 39% of economists said they rose in the past three months, down from 61% a year earlier. And only 38% said they expect sales to rise in the next three months, also down from 61% a year ago.
Many business economists blamed President Trump's tariffs on steel, aluminum, and on most imports from China for worsening business conditions. Thirty-five per cent said the duties have hurt their companies, while just 7% said they had a positive effect.
Of those who said tariffs had impacted their companies, 19% said they had lowered their sales and 30% said the duties pushed up costs.
That has cut into profits for many firms. Just 19% of economists said their companies' profit margins have risen in the past three months, barely half the 37% who reported greater profits a year earlier.
Two-thirds of the economists surveyed now forecast that the economy will grow just 1.1% to 2% from the third quarter of 2019 through the third quarter of 2020. A year ago, they were more bullish: Nearly three-quarters forecast growth of 2.1% to 3% from the third quarter of 2018 through the third quarter of 2019.
The NABE surveyed 101 economists at companies and trade associations from Sept. 26 through October 14.
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US Manufacturing Activity Sank to Lowest Level Dince 2009
By Bani Sapra
U.S. factory activity hit its lowest level in more than a decade, as President Donald Trump's trade wars take a toll on American and global manufacturing.
The Institute for Supply Management, an association of purchasing managers, said Tuesday that its manufacturing index shrank for the second straight month to 47.8% in September, down from 49.1% in August. Any reading below 50 signals that the sector contracting.
Investors on Wall Street reacted immediately, as the reported slowdown in manufacturing fanned fears of weakening global growth. The Dow Jones Industrial Average, which was up this morning, plunged more than 200 points to 26,739, after the ISM report was released.
The nearly 15-month trade spat with China and tariffs on steel, aluminum and other products may have been intended to help US manufacturers. But it appears to be having the opposite effect, spurring the Federal Reserve cut interest rates by a quarter-point in September for the second time this year. Weakening business confidence and softening global demand have also hit American factories hard, prompting pullbacks in both production and employment. This month's measure reported the lowest level of manufacturing activity since June 2009, the last month of the Great Recession.
President Donald Trump blamed the Federal Reserve for U.S. manufacturing's difficulties, arguing that the Fed's rate hikes last year pushed up the value of the dollar, which makes U.S. goods more expensive overseas.
``As I predicted, Jay Powell and the Federal Reserve have allowed the Dollar to get so strong, especially relative to ALL other currencies, that our manufacturers are being negatively affected,'' Trump said on Twitter. ``Fed Rate too high. They are their own worst enemies, they don't have a clue. Pathetic!''
But the report suggests that global trade played a bigger role. Timothy Fiore, Chair of the ISM Manufacturing Business Survey Committee, pointed to the 2.3 percentage point drop in a measure of new export orders, its lowest level since March 2009. The ISM survey also includes comments from its members, and three of the 10 manufacturers quoted said that the tariffs are hurting their business. None blamed a strong dollar or the Fed. Most economists also point to the trade fight for manufacturers' problems.
``Simmering trade tension is the obvious culprit for the manufacturing weakness,'' said Eric Winograd, senior U.S. economist at AllianceBernstein.
``The trade war is wreaking havoc, to the point where the incipient upturn in manufacturing in China is not transmitting, at all, to the U.S.,'' said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
The trade war is also hurting economies around the world, as both trade and manufacturing are slowing at a pace close to the Great Recession. The World Trade Organization said Tuesday it expects volumes of traded goods to rise 1.2% this year, its weakest pace since 2009.
Surveys of purchasing firms compiled by the data firm IHS Markit pointed toward declines in manufacturing in South Korea, Japan, Indonesia and Malaysia, all export-reliant countries. The U.K. factory sector has also remained in negative terrain for five consecutive months, its longest stretch since the financial crisis.
Weakening production is spilling over to hurt the American workforce. The ISM survey indicates that more factory owners are considering cutting jobs than the prior month. Employment contracted at a faster rate in September, and one of the survey respondents said that lower demand for products ordered had prompted their company to cut 10% of its workforce.
Some economists also said that the ongoing union worker strike at General Motors could have played a role in a slower automotive market.
``That strike has now begun to affect production at suppliers too,'' said Paul Ashworth, chief US economist at Capital Economics. When the strike ends, we would expect the manufacturing sector surveys to rebound too.``
Measures of production and employment slipped by 2.2% and 1.1%. New orders rose a slight 0.1% but remained in negative territory.
AP Economics Writer Christopher Rugaber contributed to this report.
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US Factories Shrink For 1st Time in 3 Years Amid Trade War
By Bani Sapra & Christopher Rugaber
The U.S.-China trade war and slower global growth are weighing on the U.S. economy, reducing factory output in August for the first time in three years.
A survey by the Institute for Supply Management, an association of purchasing managers, on Tuesday showed that factory production and new orders fell sharply last month and are now shrinking. U.S. manufacturers also cut jobs, the survey found. The data has fueled concerns that the broader U.S. economy is weakening.
Other recent data has shown factory output is decreasing in Europe and much of Asia, in large part because of the U.S-China trade fight. That has weakened global demand for U.S. exports. Manufacturing activity is declining in 17 out of 30 countries surveyed by the consulting firm IHS Markit.
More than half of the public comments from companies surveyed by ISM pointed to the economic uncertainty as a drag on their businesses.
The ISM's manufacturing index slid to 49.1 last month, from 51.2 in July. That's the lowest reading issued since January 2016. Any reading below 50 signals a contraction in the sector.
While consumer spending in the U.S. has remained strong, the deterioration in U.S. manufacturing could slow job growth and weaken the economy.
Investors were dismayed by the news. Stock prices, which had already fallen at the market's open, dropped further after the report's release. The Dow Jones Industrial Average slumped 372 points, or 1.4%, in afternoon trading.
WHAT DOES THIS MEAN FOR THE U.S. ECONOMY?
The report suggested manufacturing will likely continue to struggle, raising concerns among some economists about a recession.
Along with the lower factory production figure, a measure of new orders also fell below 50, a sign that output will likely remain weak in the coming months.
``Another couple of months of declines on this scale would leave the U.S. facing an entirely unnecessary and self-inflicted recession,'' Ian Shepherdson, the chief economist at Pantheon Economics, wrote in a research note.
Yet that is not a foregone conclusion. A similar downturn in manufacturing in 2016 didn't pull the broader U.S. economy into recession.
A sharp drop in oil prices in 2015 and lower prices for many agricultural products caused oil drillers and farmers to cut back the following year on their investment in tractors, machinery and drilling rigs.
That, in turn, lowered output all along the manufacturing supply chain, from steelmakers to heavy equipment companies such as Caterpillar. Business spending plunged and economic growth fell to just 1.6% in 2016, barely half the 2.9% increase the year before.
Similar dynamics are at play now: The trade war is discouraging businesses from investing in new equipment and expanding. Business spending fell in the April-June quarter for the first time since 2016.
But so far manufacturers aren't cutting back as much as they did then. Factory hiring is holding up better, so far. Back in May 2016, factories actually shed jobs over the preceding 12 months. But as of July, manufacturers had added more than 150,000 jobs in the previous year, though those gains are slowing.
WHAT ROLE HAS THE TRADE WAR PLAYED?
President Trump's fight with China, and his tariffs on steel and aluminum imports, are intended to help U.S. manufacturers but are now having the opposite effect.
The ISM report was issued against the backdrop of a new round of tariffs on Chinese goods, which began this Sunday. Those tariffs are targeted at consumer goods and will likely raise prices for American consumers. They also point to a trade war that shows little sign of stopping.
Timothy Fiore, chairman of the ISM's Manufacturing Business Survey Committee, said that the decline in new orders was driven by new export orders, which fell to their lowest since April 2009 when global trade was hit by the financial crisis.
``Tariffs are still weighing heavily on supply managers' minds as they adjust their supply or manufacturing sources,'' Fiore said. ``Some industries can do it quickly while others need more time.''
WHAT ABOUT THE GLOBAL ECONOMY?
Surveys of purchasing managers this week have suggested that the uncertainty generated by the trade war has had a global impact.
IHS Markit's global manufacturing index rose from 49.3 to 49.5 in August, but remained in negative territory.
Its China survey showed mixed results, as domestic activity _ bolstered by government spending in infrastructure _ overshadowed the drop in an index measuring export orders. Meanwhile, manufacturing activity declined across Japan, Taiwan and South Korea.
In Europe, German manufacturing activity remained close to July's seven-year low, as new orders fell, producers scaled back output, and job losses rose steeply.
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