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January 6, 2016 10:20 AM, EST
Service Companies Outpace Manufacturers, Sustaining Economy
Craig Warga/Bloomberg
American service companies continued to outperform their manufacturing counterparts in December as orders and employment picked up, indicating the world’s largest economy will keep expanding this year.

The Institute for Supply Management’s nonmanufacturing index, which covers almost 90% of the economy, came in at 55.3 last month, with readings greater than 50 signaling growth. While the level is down from November’s 55.9 and the weakest since April 2014, the drop was caused by a plunge in the deliveries component that indicates suppliers had fewer order backlogs to process.

The gap between the Tempe, Arizona-based ISM’s services and manufacturing gauges has averaged almost eight points over the past six months, the widest over a similar period since 2001. The disparity signals retail and health care are among the industries less affected by the slowdown in global demand and surge in the value of the dollar that have hurt U.S. factories.

“The nonmanufacturing index is more reflective of domestic demand, whereas the manufacturing index is more exposed to foreign demand, and, of course, exports have been weak,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, said before the report. “Overall, growth is still pretty solid.”

The median forecast in a Bloomberg News survey of 71 economists called for a December reading of 56, with estimates ranging from 54 to 57.5. The measure averaged 57.1 in 2015, up from 56.3 in the previous year and the best annual performance in a decade.

The new orders gauge climbed in December to 58.2 from 57.5 the prior month, while a measure of services employment increased to 55.7 from 55.

The business activity index, which parallels ISM’s factory production gauge, advanced to 58.7 last month from 58.2 in November. A measure of prices paid declined to 49.7, indicating costs were easing, from 50.3.

The drop in the headline figure was due to a slump in the supplier deliveries gauge, which measures how quickly companies are able to fill orders. That index slumped to a three-year low of 48.5 from 53 the prior month. Readings below 50 mean delivery times quickened.

The ISM services survey covers an array of industries, including retail, health care, agriculture and construction.

Steady job gains last year helped drive domestic demand. A jobs report due Jan. 8 from the Labor Department is projected to show employment made further strides in December. Economists are predicting payrolls climbed by about 200,000 last month after a 211,000 increase in November.

At the same time, weaker overseas economies, a stronger dollar and an inventory build in the first half of 2015 continue to dog the nation’s factories.

The supply management group’s survey of factories earlier this week showed manufacturing contracted in December at the fastest pace in more than six years. The gauge dropped to 48.2, the lowest level since June 2009, from 48.6 in November.

Goods producers worldwide are bogged down. Factories in China contracted in December for a fifth consecutive month as the world’s second-largest economy is poised to grow in 2016 at the slowest pace since 1990. In the United Kingdom, manufacturing unexpectedly cooled in December, suggesting it made little contribution to the economy in the final quarter of 2015.

The spread between the two ISM gauges averaged 7.6 points in the second half of 2015. The last time the gap was larger, in the six months ended in June 2001, when factories were hobbled by the crash in the information technology industry that prompted firms to scrap investment.

Federal Reserve policymakers are gauging momentum across U.S. industries to help determine the timing of further changes to the benchmark interest rate. A quarter-percent increase in December marked the first rise since 2006.