Robust Service Sector Keeps Fed Rate Hike in Play

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Alan Diaz/APJob seekers and recruiters mix at a recent employment fair in Miami Lakes, Fla.
By Lucia Mutikani

WASHINGTON -- Private job growth slowed in July, but a surge in service-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 Wednesday showing an increase in imports of food, automobiles, industrial supplies and consumer goods in June.

%VIRTUAL-pullquote-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.%"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 service-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 U.S. economy.

The index was buoyed by a 5.5 percent increase in the new orders gauge, which also hit its highest level since August 2005. A measure of service industry employment soared 6.9 percent 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 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 U.S. government's more comprehensive employment report on Friday. It is, however, not considered a good predictor of nonfarm payrolls.

Prices for U.S. Treasury debt fell, while U.S. stocks edged higher. The dollar was slightly firmer against a basket of currencies.

'Approaching Full Employment'

According to a Reuters survey of economists, nonfarm payrolls likely increased 223,000 last month, matching June's job gains. Job cuts in the energy sector in the aftermath of the sharp drop in crude oil prices have take some edge off the labor market in recent months.

"Nonetheless, even at this slower pace of growth, the labor market is fast approaching full employment," said Mark Zandi, chief economist at Moody's Analytics in West Chester, Pennsylvania.

The Fed has kept its short-term interest rate near zero since December 2008. A report last week showing wage growth stalled in the second quarter cast doubt that the U.S. central bank would hike rates at its September policy meeting.

In a separate report Wednesday, the Commerce Department said the U.S. trade deficit increased 7.1 percent to $43.8 billion in June.

But May's trade gap was revised down by $1 billion to $40.9 billion, leading economists to expect that the second-quarter gross domestic product estimate would be revised up from the 2.3 percent annual pace the government reported last week.

May construction and factory inventory data released this week also have suggested second-quarter growth could be revised to at least a 3 percent annual rate when the government publishes its second GDP estimate later this month.

June's trade deficit was driven by a 1.2 percent rise in imports, as domestic demand grew solidly in the second quarter. The dollar, which has gained 15 percent against the currencies of the United States' main trading partners since June 2014, is also making imports cheaper.

Despite firming domestic demand, some of the imports likely ended up in inventories, which remained at very high levels in the second quarter. That would act as drag on third-quarter growth.

Imports of food and automobiles were the highest on record in June. Dollar strength and sluggish global demand crimped exports, which slipped 0.1 percent in June. It was the second straight monthly drop in exports.

Imports from the European Union surged 4 percent to a record high, leaving the trade deficit with the EU at an all-time high.

Though exports to Mexico rose solidly, they were outpaced by a jump in imports, putting the trade deficit with that country at the highest level since May 2012. The politically sensitive U.S.-China trade deficit rose 3.3 percent to $31.5 billion.

-Richard Leong and David Gaffen contributed reporting from New York.

9 Numbers That'll Tell You How the Economy's Really Doing
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Robust Service Sector Keeps Fed Rate Hike in Play
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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