Service Sector Expands at Fastest Pace in Three Months

The U.S economy gained momentum in October, according to the Institute for Supply Management's service sector index, which rose a better-than-expected 1.1 points to 54.3.

ISM service index readings above 50 signal an expansion -- below 50, a contraction. A Bloomberg survey had expected the index to rise to 54.0 in October from 53.2 in September.

Equally significant, the index's key components continued to signal growth in October, as well.

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The closely watched new orders component -- a gauge of future demand -- rose 1.8 points to 56.7. Also, the business activity and production component jumped 5.6 points to 58.4.

In addition, the employment component rose to 50.9 in October from 50.2 in September -- its second straight month above the 50 demarcation line -- something that may result in increased service sector hiring in the quarters ahead.

Also, the prices paid component jumped to 68.3 in October from 60.1 in September and the inventories component inched higher, to 47.5 from 47.0.

October Comments Mixed

While respondents' comments in October were mixed, overall they pointed to signs of economic stabilization, the ISM said:

"Business is picking up ever so slowly, but improving" (transportation and warehousing sector).

"Generally stable-to-improving demand for our products" (wholesale trade).

"Some positive growth in comp [comparable] sales over the past 2 to 3 months" (accommodation and food services).

"Economy still slow for our industry, with very small signs of recovery. Strong downward pricing pressures from customers affecting business" (professional, scientific and technical services sector).

Economists, business executives, and policy makers monitor the ISM service index, due to the large role services play in the U.S. economy and trade -- historically, about 65% to 70% of the U.S. GDP. The non-manufacturing survey polls about 400 firms in 60 sectors.

October's service sector report should fall in the "win" column for stock market bulls. The sector is showing signs of increased strength. Add that strength to a manufacturing sector that continues to expand, and declining initial jobless claims, and the bulls can plausibly argue that the U.S. economy is not as weak as it was about two months ago.

Further, provided this pattern continues, and commercial activity is not complicated by another credit market ripple, companies will likely increase hiring to meet gowing production needs.

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