US economy firing on all cylinders: data
May 4, 2006 - 7:14AM
Activity in both the vast US services sector and at factories accelerated more than expected, according to data that pointed to fresh economic vigour and the risk of more interest rate hikes.
Most economists are expecting economic growth to slow from a torrid first-quarter pace of 4.8 per cent, yet the latest figures showed no hints of slowing and appeared likely to keep the Federal Reserve leaning toward further rate rises. Fed Chairman Ben Bernanke said last week a pause in the rate-hike cycle was possible.
The Institute for Supply Management's services index rose to 63.0 in April from 60.5 in March, with new orders hitting a two-year high, confounding Wall Street estimates for a slowdown to 59.2.
In addition, the government reported new factory orders rose a stronger-than-expected 4.2 per cent in March, beating estimates for a 3.5 per cent gain, as demand for transportation equipment, computers and electronics proved robust.
Treasury debt prices fell and the dollar firmed against the euro after the data.
"It does suggest that the overall economy is improving and for the market it is part of the recent theme - all the numbers are coming in on the stronger side of expectations," said Scott Brown, chief economist at Raymond James & Associates in St Petersburg, Florida.
Financial markets have fully priced in another rate rise at the Fed's policy meeting next week, and on Wednesday raised the chances of a follow-up move in June.
"They want to keep their options open for late June but most likely they may end up leaning towards another rate hike as the data continues to come in strong," said Brown.
The services sector accounts for about 80 per cent of US economic activity, including businesses like restaurants, hotels, hair salons, banks and airlines.
"This suggests GDP growth momentum of 4.5 per cent to 5.0 per cent, rather than the slowdown to 3.25 per cent trend growth the Fed is banking on," said Ian Morris, chief US economist at HSBC.
"As a result we think this piece of news is significantly hawkish."
Businesses cited rising energy costs, with the prices-paid index hitting a six-month high, but overall activity was not dampened as new orders surged to 64.6 from 59.5.
"Most of the comments our members made this month were very positive, very bullish," said Ralph Kauffman, chair of the non-manufacturing ISM business survey committee.
"Retailers indicated that the prices they are paying are going up. I don't think that their sales are having a problem. Their profit margins are probably being squeezed somewhat."
Kaufmann also noted inventories rose in April and businesses were deliberating stockpiling goods in expectations of increased business ahead.
Separate government data showed March's gain in factory orders was caused in part to a 14.7 per cent jump in new orders for transportation equipment, while civilian aircraft and parts orders soared 71.3 per cent.
Orders for non defence capital goods climbed 12.9 per cent, the strongest increase since November. Stripped of aircraft, orders for non defence capital goods - a proxy for business spending - advanced a still-strong 3.9 per cent.
Orders for durable goods, expensive items meant to last three years or longer, advanced an even stronger 6.5 per cent in March, revised up from a 6.1 per cent gain reported last week.
The report also contained information on factory inventories that implied a small upward revision to first quarter GDP of around 0.2 percentage point, economists said, which combined with other revisions point to a pace above five per cent.
A new indicator released for the first time suggested a solid gain in April jobs, ahead of the official payrolls report due on Friday.
ADP Employer Services, a private firm, estimated the 178,000 private jobs were added in April, based on a survey sample of 14 million workers. It also estimated 22,000 government jobs were added, which would bring the month's total payrolls increase to 200,000, in line with current Wall Street consensus.
Financial markets are hoping the April jobs report will help clarify the outlook for official interest rates. Fed Chairman Bernanke last week said a pause in tightening was possible, but rates rises could resume even after a break in tightening.
