US services sector grows more than expected in January - ISM

Activity in the US services sector grew more than expected in January, according to figures released on Monday.

The Institute for Supply Management's index of non-manufacturing activity rose to 59.9 from 56.0 in January, exceeding expectations for a reading of 56.7.

The non-manufacturing business activity index rose to 59.8 from December's reading of 57.8.

Meanwhile the new orders index printed at 62.7 from 54.5 in December and the employment index rose to 61.6 from 56.1, while the prices index edged up to 61.9 in January from 56.3 the month before.

"The non-manufacturing sector reflected strong growth in January after two consecutive months of pullback. Overall, the majority of respondents’ comments are positive about business conditions and the economy. They also indicated that recent tax changes have had a positive impact on their respective businesses," the ISM said.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said: "The consensus for the headline always looked too low; the index tends to track movements in core retail sales, with a lag of a month or two. It's not a leading indicator of anything, but it certainly looks good. We're more interested in the employment index, which rose to a new all-time high - the survey began in 1997 - of 61.6, from 56.3 in December. On the face of it, this is consistent with payroll growth of about 400K. That's not going to happen, given the tightness of labour supply. But it adds more weight to our long-standing fear that the first few Fed rate hikes have been accompanied by - perhaps even caused - a strengthening in an economy already very close to full employment."

Michael Pearce, senior US economist at Capital Economics, said: "The surge in the ISM non-manufacturing index reverses all of the decline seen over the past few months and suggests that economic growth continued to accelerate at the beginning of 2018. A weighted average of the ISM manufacturing and non-manufacturing indices is consistent with GDP growth of around 4% annualised.

"The big increase in the headline ISM non-manufacturing index, from 56.0 to 59.9 in January, smashed even our above-consensus forecast of a rise to 57.0. That increase more than reversed the drop back seen over the past few months and leaves the index at its highest point since 2005. The rise was driven mainly by a surge in the new orders component, perhaps early evidence that tax cuts are boosting demand. The employment index also rose to a record high, consistent with private payrolls rising by a barely believable 350,000."