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Forecast

Service sector strong through uncertainty

Industries make up  90 percent of economy

Service industries expanded in January at about the same pace as the prior month, showing the biggest part of the economy is holding up in the face of federal government budget battles.

The Institute for Supply Management’s non-manufacturing index cooled to 55.2 last month from a 10-month high of 55.7 in December, the Tempe, Ariz.-based group said this month. Economists projected the gauge would ease to 55, according to the Bloomberg survey median. Readings above 50 signal expansion.

Sustained consumer spending and a rebound in housing will probably keep benefiting companies such as MasterCard and PulteGroup, helping propel service industries that account for almost 90 percent of the economy. A job market that continues to heal will also provide households the wherewithal to manage a tighter budget after a two percentage-point increase payroll taxes.

“The expansion in services will continue,” Brian Jones, senior U.S. economist at Societe Generale in New York, said before the report. “Consumer spending is growing, housing is improving, the job market is improving.”

Facts and figures

Estimates in the Bloomberg survey of 76 economists ranged from 53 to 57.5. The index, which includes industries ranging from utilities and retail to health care, housing and finance, has averaged 53.5 since the recession ended in June 2009.

Eight non-manufacturing industries, including construction, finance and real estate, reported growth in January, while nine said business contracted.

The ISM’s employment gauge jumped to 57.5, the highest in almost seven years, from 55.3 in the prior month, today’s report showed. The measure of new orders decreased to 54.4, the lowest since April 2012, from 58.3. The gauge of business activity dropped to 56.4 from 60.8.

In China, service industries may be on the mend, expanding last month at the fastest pace since August as gains in retailing and construction helped drive a recovery. The non- manufacturing Purchasing Managers’ Index was 56.2 in January after 56.1 a month earlier, the Beijing-based National Bureau of Statistics and China Federation of Logistics & Purchasing said in a statement Feb. 3.

U.S. service industries will benefit from manufacturing that’s starting to emerge from a slump in the second half of 2012. The Institute for Supply Management’s factory gauge advanced to a nine-month high of 53.1 in January, the group reported last week.

Looking at housing

A stronger housing market is also underpinning the economy. Spending on all construction projects rose 0.9 percent in December to an $885 billion annual rate, the fastest since August 2009, Commerce Department figures showed on Feb. 1. Homebuilding outlays increased 2.2 percent to the highest level since November 2008.

The gains have generated more optimism among companies such as Bloomfield Hills, Mich.-based PulteGroup, the largest homebuilder by market value.

“The combination of incredibly low mortgage rates, continued increases in rental rates and especially rising home prices, and very low – and likely to stay low – inventory levels for housing lead us to believe that 2013 will be a better year for U.S. housing than 2012,” Chief Executive Officer Richard Dugas said on a Jan. 31 earnings call.

Realtors are also benefiting. Figures from the National Association of Realtors show 4.65 million previously owned homes were sold in 2012, up 9.2 percent from the previous year and the biggest increase since 2004.

The economy is also creating jobs. Employers added 157,000 workers in January after a revised 196,000 rise the prior month and a 247,000 surge in November, Labor Department data showed last week. Revisions added a total of 127,000 jobs in the last two months of 2012. A separate survey of households showed the jobless rate unexpectedly rose to 7.9 percent from 7.8 percent.

A hurdle for consumers is higher taxes. As part of its budget agreement on Jan. 1, Congress agreed to let the tax, used to pay for Social Security benefits, return to its 2010 level of 6.2 percent from 4.2 percent. That reduces the paycheck by about $83 a month for someone who earns $50,000.

Republican leaders in the House of Representatives are considering a stopgap measure to fund the government for the rest of the fiscal year that could reduce spending below $1 trillion. They are running through all possible scenarios as two fiscal deadlines near. Automatic spending cuts stemming from an impasse between the White House and Congress over deficit reduction take effect on March 1, and the continuing resolution funding U.S. government operations expires on March 27.

First quarter outlook

MasterCard, the second-biggest U.S. payments network, posted fourth-quarter profit that beat analysts’ estimates as customers shopped more. Nonetheless, the Purchase, New York- based business is cautious about the first-quarter outlook.

“Any optimism that we have about the economy, however, will be tempered until we see what happens to consumer confidence and spending” as federal budget negotiations continue, Chief Executive Officer Ajay Banga said on a Jan. 31 conference call with analysts.

Elevated unemployment underscores the decision by Federal Reserve policy makers to keep purchasing securities at the rate of $85 billion a month after the economy “paused” because of temporary forces, the Federal Open Market Committee said in a Jan. 30 statement at the conclusion its meeting in Washington.

The Fed left unchanged its statement that it plans to hold its target interest rate near zero as long as unemployment remains above 6.5 percent and inflation remains no more than 2.5 percent.

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