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US Service Economy Accelerates at Fastest Pace in more than 2 years: Markit

H.S. Borji
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The US service economy expanded sharply in May, as output growth reached a 26-month high and job creation rebounding from a 13-month low.

Markit Group’s gauge of US service activity increased sharply from 55.0 to 58.4. The flash estimate was 58.6. Economists forecast no change to the May reading. The composite PMI index, which covers manufacturing and services, increased from 55.6 to 58.4.

A reading above 50 signifies expansion in business activity, whereas a reading below that level indicates contraction.

The service economy continued to accelerate from February’s four-month low, as output growth soared and overall activity expanded for the seventh consecutive month. Service providers noted the fastest rise in new work in more than three years, driven by rising demand and an improved economic climate.

In response to heavier workloads, service providers experienced an increase in unfinished business for the first time since February, while backlog accumulation rose at the fastest pace in six months.

Increased pressure on operating capacity and greater client demand boosted job creation in May. Payrolls rose at the sharpest pace since January, with two-thirds of panel members forecasting a rise in business activity over the next 12 months.

The ADP Institute reported today that US employers added only 179,000 private payrolls in May, raising concern the labour market was easing after three consecutive months of solid growth. The Labor Department will post official nonfarm payroll estimates Friday. Economists expect private payrolls to have increased by 218,000 in May, following a gain of 288,000 in April that was biggest in more than two years.

“The US economy is moving into the summer with renewed vigour,” said Markit chief economist Chris Williamson in a press release. “The final PMI for May has come in slightly weaker than the earlier flash estimate but is yet another indication that business activity rebounded strongly in the second quarter.”

Combined with the manufacturing report, the services data suggest the US economy expanded 3 percent annually in the second quarter, Williamson also noted. A panel of economists surveyed by Bloomberg earlier this quarter suggested the US economy was on pace to grow 3.5 percent annually between April and June.

The Federal Reserve is confident the economy will accelerate faster this year, erasing a troubled first quarter that saw the economy contract for the first time since 2011. US GDP declined 1 percent in the first quarter, weighed down by severe winter.

In a separate report, the Institute for Supply Management said its non-manufacturing PMI rose 1.1 percentage points to 56.3 in May, exceeding estimates. Seventeen non-manufacturing industries reported growth in May, led by construction, wholesale trade, and management of companies & support services. Mining was the only industry reporting contraction last month, ISM data showed.

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