February 5, 2018 12:15 PM, EST

Service Industries Expand by Most in at Least 10 Years

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America’s service industries expanded in January at the fastest pace in at least a decade as a surge in orders led to a pickup in hiring, figures from the Institute for Supply Management showed Feb. 5.

Highlights of ISM Non-Manufacturing for January

• Non-factory index jumped to 59.9 (estimated 56.7), exceeding all forecasts in a Bloomberg survey, from 56; readings above 50 indicate expansion.

• Employment gauge rose to 61.6, the strongest in records to July 1997, from 56.3.

• Measure of new orders surged to a seven-year high of 62.7 last month from 54.5.

Key Takeaways

Faster growth at the non-manufacturing industries that make up almost 90% of the economy, combined with robust ISM readings on factory activity, signal sustained demand at the start of the year.

The month-over-month advance in orders was the second-biggest in data going back to mid-1997 and suggests businesses are responding to the passage of tax-cut legislation and boosting capital spending. What’s more, a gauge of export orders edged up to a three-month high as global economic growth picks up.

“The economy has come out really strong for the month of January,” Anthony Nieves, chairman of the ISM non-manufacturing survey committee, said on a conference call with reporters. He credited the gain to “positives” such as a pickup in investment, elevated business confidence and synchronized improvement in global demand.

The results are good news for the nation’s workforce, as the ISM’s employment index soared. That’s consistent with a government report last week that showed net hiring at service producers in January was the strongest in three months.

The improvement in service-related employment, a gain in orders and stronger business activity bode well for future economic growth, supporting forecasts that the Federal Reserve will raise interest rates at least three times in 2018.

What ISM Respondents Said:

Signs of strong growth (in) financial performance expectations given the recent tax changes.

— Finance & Insurance

Positive outlook for 2018. We see huge pricing pressure.

— Health Care

Business is starting off solid.

— Accommodation & Food Services

Overall, sales velocity looks strong.

— Wholesale Trade

What Bloomberg Economists Say

Heightened business optimism about tax reform, which has already manifested itself in consumer sentiment metrics, seems to have also boosted the business activity component of the ISM survey. Moreover, the previous decline in new orders was likely a result of elevated order backlogs earlier in the fall. As backlogs normalized, new orders spiked in January.

— Yelena Shulyatyeva and Carl Riccadonna, Bloomberg Economics

Other Details

• Official ISM data on main non-manufacturing index begin in 2008, though Bloomberg has calculated the index for previous years based on the subindexes, showing that January’s figure is highest since August 2005.

• Fifteen industries, including management and support services, retail trade and construction, reported growth in January.

• ISM index of business activity, which parallels the ISM’s measure of factory production, increased to 59.8 from 57.8.

• Measure of export orders rose to 58 from 56.5.

• Index of prices paid advanced to a four-month high of 61.9 from 59.9.

• Gauges of supplier deliveries held at 55.5.

With assistance by Alexandre Tanzi