US Services Sector Growth Accelerates, Private Payrolls Jump

U.S. services sector activity accelerated in August and private employers boosted hiring.
US Services Sector Growth Accelerates, Private Payrolls Jump
A man rubs his eyes as he waits in a line of job seekers, to attend the Dr. Martin Luther King Jr. career fair held by the New York State department of Labor in New York on April 12, 2012. (Lucas Jackson/Reuters)

WASHINGTON—U.S. services sector activity accelerated in August and private employers boosted hiring, suggesting the economy continued to grow at a moderate pace despite trade tensions which have stoked financial market fears of a recession.

The upbeat reports on Thursday, Sept. 5, came on the heels of data this week showing the manufacturing sector contracted for the first time in August as the trade war between the United States and China intensified.

But given the erosion of business confidence as a result of the year-long trade impasse and the threat it poses to the longest economic expansion in history, the Federal Reserve is still expected to cut interest rates again this month.

The U.S. central bank lowered borrowing costs in July, citing growing risks to the economy, now in its 11th year of expansion, from the trade fight and slowing global growth. China and the United States on Thursday agreed to hold high-level trade talks in early October in Washington, according to the Chinese commerce ministry.

“Extreme uncertainty over trade issues has soured the sentiment of some in the business community, but companies continue to hold on tight to the workers they have and are also onboarding new workers at a fast clip,” said Chris Rupkey, chief economist at MUFG in New York. “This isn’t what a recession is supposed to look like.”

The Institute for Supply Management said its non-manufacturing activity index increased to a reading of 56.4 in August from 53.7 in July. A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of U.S. economic activity.

Economists polled by Reuters had forecast the index would rise to 54.0 in August.

The ISM said businesses “remain concerned about tariffs and geopolitical uncertainty,” but also noted “they are mostly positive about business conditions.”

August’s surge in services industry activity reflected increases in measures of production and new orders.

But a gauge of services industry employment dropped to 53.1, the lowest level since March 2017, from 56.2 in July. That suggests nonfarm payrolls probably increased at a steady clip in August, even though the ADP National Employment Report on Thursday showed private payrolls surging by 195,000 jobs this month after rising by 142,000 in July.

Resilient Labor Market

The ADP report, which is jointly developed with Moody’s Analytics, came ahead of the release of the government’s more comprehensive employment report on Friday.

The ADP report, however, has a poor record forecasting the private payrolls component of the government’s employment report because of differences in methodology. Given that August payrolls have a tendency to undershoot expectations, the strong ADP report is unlikely to change economists’ forecasts.

According to a Reuters survey of economists, nonfarm payrolls probably increased by 158,000 jobs last month after rising by 164,000 in July. Job growth has slowed from an average of 223,000 per month in 2018.

But the pace of employment gains remains well above the roughly 100,000 jobs needed per month to keep up with growth in the working-age population. The unemployment rate is expected to have held at 3.7 percent in August for a third straight month.

U.S. stock indexes were trading higher on the back of the data and news that Washington and Beijing had agreed to resume trade talks next month. The dollar held near one-week lows against a basket of currencies. U.S. Treasury yields were trading higher. Labor market resilience was also underscored by a third report from the Labor Department on Thursday which showed initial claims for state unemployment benefits increased 1,000 to a seasonally adjusted 217,000 for the week ended Aug. 31.

Economists polled by Reuters had forecast claims would be unchanged at 215,000 in the latest week.

The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose 1,500 to 216,250 last week.

In another report on Thursday, the Labor Department said nonfarm productivity, which measures hourly output per worker, increased at an unrevised 2.3 percent annualized rate in the last quarter.

Productivity also rose at an unrevised 3.5 percent rate in the first quarter. Economists polled by Reuters had expected second-quarter productivity would be revised down to a 2.2 percent rate.

Manufacturing productivity fell at a 2.2 percent rate in the second quarter, instead of the 1.6 percent pace estimated last month. That was the weakest since the third quarter of 2017 and followed a 1.2 percent pace of increase in the first three months of the year.

By Lucia Mutikani