Surge in orders boosts services sector; jobless claims tumble

Thu Jan 5, 2017 12:23pm EST
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By Lucia Mutikani

WASHINGTON (Reuters) - U.S. services sector activity held at a one-year high in December as new orders surged, while the number of Americans filing for unemployment benefits fell to near a 43-year-low last week, suggesting the economy ended 2016 with strong momentum.

The Institute for Supply Management (ISM) report on Thursday also showed a sustained increase in prices paid by services industries for inputs, potentially signaling that the days of very low inflation could be coming to an end.

The economy is likely to get a boost from President-elect Donald Trump's plan to increase infrastructure spending and cut taxes. That, together with a tightening labor market and firming inflation, could allow the Federal Reserve to increase interest rates in March, economists say.

"It appears that both growth and price pressures are beginning to pick up and we continue to project the next rate hike takes place at the March Fed policy meeting," said John Ryding, chief economist at RDQ Economics in New York.ISM said its non-manufacturing activity index was at 57.2 last month, matching November's reading, which was the highest since October 2015. A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of U.S. economic activity.

Services industries reported new orders jumped 4.6 percentage points last month to their highest level since August 2015.

Prices paid by non-manufacturing industries for materials and services rose 0.7 percentage point, hitting their highest level in nearly 2-1/2 years and marking the ninth consecutive monthly increase. That suggested inflation, which has persistently run below the Fed's 2 percent target, was poised to rise in the coming months.

A measure of services sector employment fell 4.4 percentage points last month. The drop, however, followed a surge in November, which had lifted the subindex to a 13-month high. ISM noted that labor, especially in the construction sector, "continue to be in short supply."

Economists do not believe that the decline in services employment last month will significantly impact December's nonfarm payrolls report, which the U.S. government is scheduled to release on Friday.   Continued...

Job seekers break out to visit corporate employment personnel at a U.S. Chamber of Commerce Foundation "Hiring Our Heroes" military job fair in Washington January 8, 2016. REUTERS/Gary Cameron