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US Service Economy Surges in May as Output Hits 26-Month High: Markit

H.S. Borji
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The US service economy accelerated further in May, as output growth reached a 26-month high and job creation hit a four-month high.

Markit Group’s gauge of US services surged from 55 to 58.4. Economists called for a smaller increase to 55.4 after the April reading was revised upward from the flash estimate of 54.2. A reading above 50 signifies expansion in service activity, whereas a reading below that level indicates contraction.

The services sector in May expanded at the fastest pace since March 2012, led by a rebound in output and new business growth. Business activity was supported by the fastest rise in new work in more than three years, underscoring the service economy’s continual rebound in the second quarter.

May marked the seventh consecutive month service sector business activity had increased. Survey participants noted stronger business conditions and improved client demand. In response, participants expressed the brightest outlook on business activity since January, with nearly two-thirds of survey respondents indicating they expect business activity to rise over the next 12 months.

A sharp increase in business led to an acceleration in job creation. The rate of hiring rebounded from April’s 13-month low, as payrolls rose at the fastest pace since January.

Markit’s April PMI contradicted the Labor Department’s official nonfarm payrolls report showing the service economy generated 220,000 new payrolls last month. Total nonfarm payrolls increased 288,000 in April, the fastest pace in more than two years. The unemployment rate declined from 6.7 percent to 6.3 percent, official data showed.

“May’s flash services PMI survey is a further signal that the US economy has regained momentum through the second quarter of the year,” said Markit senior economist Tim Moore. “New business growth within the service sector reached its fastest for over three years amid the greatest month-on-month acceleration since the index began in late 2009.”

The May figures should help “alleviate concerns that the first quarter slowdown reflected underlying sluggishness in the US economy,” Moore also added, suggesting the economy is poised to expand at a stronger pace in the second quarter.

The US economy was initially estimated to have expanded 0.1 percent annually in the first three months of the year. The Commerce Department’s revised estimate, which will be released Thursday, is expected to show the economy contracted slightly in the first quarter.

May PMI figures support the Federal Reserve’s view that the economy will rebound strongly in the second quarter, leading to a faster pace of acceleration the rest of the year. According to early estimates, the US economy could grow 3.5 percent between April and June.

Markit reported last week the US manufacturing industry continued to build momentum in May, with output rising at the fastest pace in more than three years. The manufacturing PMI index increased 0.8 percentage point to 56.2, exceeding estimates.

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