US Service Sector Growth Unexpectedly Accelerated Again in January

Location: Toronto
Author: RBC Financial Group Economics Department
Date: Friday, February 4, 2011

The ISM non-manufacturing index indicated that the sector expanded for the fourteenth consecutive month in January and the pace of growth unexpectedly accelerated, as the index rose to 59.4 from 57.1 in the previous month, its highest level since August 2005 (a reading above 50 indicates the sector is generally expanding). Market expectations were for a flat reading of 57.1. The employment sub-index more than retraced the previous month’s decline to rise to its highest level since May 2006 at 54.5.

The surprise increase in the ISM non-manufacturing index was broadly based and brought the measure to its highest level in more than five years. Business activity expanded for the eighteenth month in a row, and the sub-index rose to its highest level since December 2004, increasing to 64.9 from 62.9 last month. The pace of growth in new orders picked up as well, rising to 64.9 from 61.4 in the previous month, representing its highest level since January 2004. The employment sub-index moved more firmly into expansionary territory, rising to 54.5 in January from 52.6 in December. With respect to inflationary pressures, growth in prices paid by non-manufacturing firms accelerated to 72.1 from 69.5 in December, the highest level of the sub-index since September 2008.

When combined with Tuesday’s better than expected manufacturing report, today’s ISM non-manufacturing report suggests that the U.S. economy has carried the positive momentum established in the latter part of 2010 into the new year, and we anticipate that the pace of growth will accelerate during 2011. On the jobs front, the sub-indices for both of January’s ISM reports posted strong increases in the month, which is consistent with our view that employment growth accelerated in January, with private payrolls posting an expected 141,000 gain following the increase of 113,000 in December. These gains, however, are not expected to put significant downward pressure on the unemployment rate in the near term, and given the Fed’s view that progress toward the mandate of full employment has been “disappointingly slow”, we continue to expect the Fed funds rate to remain on hold throughout 2011.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

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