Services side of U.S. economy speeds up in January, signals faster growth

The numbers: The huge service side of the U.S. economy grew faster in January and companies added more workers, signaling better times ahead as the record surge in coronavirus cases receded.

A survey of top business leaders at non-manufacturing companies such as banks, hospitals and home builders rose to a two-year high of 58.7% from a revised 57.7% in the prior month, the Institute for Supply Management said Wednesday.

Readings above 50% signals that businesses are expanding, and numbers above 55% are usually a sign of broad strength.

A similar ISM survey of manufacturers was also strong in January.

“Respondents’ comments are more optimistic about business conditions and the economy,” said Anthony Nieves, chairman of the survey.

What happened: The amount of services that businesses provided in January largely held steady. The production index registered a healthy 59.9% down less than 1 point from the prior month.

Companies also increased orders for materials — food, paper products, computers and so forth — used to provide their services. The new orders gauge climbed 3.2 points to 61.8%.

A measure of jobs and hiring, perhaps the most critical part of the survey, jumped 6.5 points to 55.2% and hit the highest level since the pandemic began last March.

That’s an indication companies hired more workers or brought back employees in January as government restrictions were lifted.

It could be a good omen for a stronger monthly U.S. employment report on Friday from the U.S. Labor Department. Economists polled by Dow Jones and the Wall Street Journal predict a 105,000 increase in new jobs in January,

Fourteen of the 18 service industries tracked by ISM expanded last month, the same as in December.

Financial firms and construction companies were among the standout performers.

Businesses that deal more frequently and directly with customers, such as restaurants, retailers, hotels and entertainment venues, suffered another setback owing to new government restrictions that only began to be lifted in late January.

Although the ISM survey indicator is still relatively high, business is still far from normal. Senior executives are asked whether business is getting better or worse, but the ISM surveys don’t reveal how much better.

Big picture: The economy downshifted at the end of 2020 after a fresh onslaught from the coronavirus pandemic. Yet rising vaccinations, the lifting of business restrictions and the promise of more federal aid from Washington are giving companies a jump-start early in the new year.

“Business outlook for 2021 looks better. Companies are optimistic that conditions will start improving by the end of the second quarter,” said one senior executive.

What they are saying? “Prospects will improve as vaccinations pick up,
restrictions are lifted and the economy, in particular the
service side, reopens,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.

Read: ADP says private-sector higher climbs in January

Market reaction: The Dow Jones Industrial Average
and S&P 500
fell in early Wednesday trades.