US service businesses expanded at a faster pace in July, providing further evidence that the economy accelerated after a second-quarter slowdown.

The Institute for Supply Management's (ISM) index of financial services, retail and other non-manufacturing companies rose to 64.8 from 59.9 in June. The index now has exceeded 50, signaling expansion in industries that account for the bulk of the economy, for 14 straight months.

Factory orders in June increased 0.7 per cent, the Commerce Department said.

"The service sector is humming," said Sung Won Sohn, chief economist at Wells Fargo & Co in Minneapolis, who forecast a reading of 64. The index "has remained at a high level for a very long time."

The purchasing-managers group's employment index dropped from a record, which economists said makes them less optimistic about forecasts that July job gains will more than double from June in Friday's payrolls.

The institute's orders index reached a record in July and the Commerce Department said investment in new equipment rose in June, suggesting that corporate spending will be more of a source of strength for the economy.

Factory orders for non-defence capital goods excluding aircraft, a proxy of future business investment, rose 1.1 per cent in June after declining 2 per cent in May, the department said. So far this year, those orders are up almost 13 per cent.

Best environment

"We are seeing the best environment in over three years for industrial manufacturers," Sandy Cutler, chief executive of Eaton Corp, the world's No 2 maker of hydraulic equipment, said Wednesday. "We believe we're beginning to see this economy build broadly."

Economists expected the Tempe, Arizona-based institute's index to rise to 61.5, according to the median of 63 forecasts in a Bloomberg News survey. The index reached a record 68.4 in April. Services account for about 85 per cent of the economy.

The increase in factory orders exceeded the median forecast and followed a revised 0.4 per cent increase in May, which the Commerce Department originally reported as a 0.3 per cent decline. Economists had predicted orders would rise 0.5 per cent.

Orders and jobs

Twelve of 17 industries increased activity in the ISM report, led by transportation, communications and business services. The index of new orders for non-manufacturing companies rose to a record 66.4 from 62.4 in June, while backlogs slipped to 55 from 55.5 and an inventory index fell to 54 from 57.5.

The ISM survey's employment index declined to 50 from June's 57.4. The number of companies adding workers fell to 18 per cent in July from 27 per cent a month earlier.

The employment readings from Wednesday's services report and Monday's related ISM manufacturing survey "take away some of the upside risks" to job-creation estimates, said Stephen Stanley, chief economist at RBS Greenwich Capital Markets in Connecticut. The median forecast of 240,000 jobs for July would be more than twice the June figure of 112,000.

Joseph LaVorgna, chief US fixed-income economist at Deutsche Bank Securities LLC in New York, lowered his forecast by 25,000 to 225,000 yesterday. "This change has no effect on our view that the US economy will be raising rates at each of the next three" Federal Open Market Committee meetings, he said.

The ISM services-industry employment index does not always track tightly to monthly jobs data. While the index reached a record in June, service-providing industries added only 122,000 workers that month, the smallest increase since February.

"Private sector estimates are strong - and they look reasonable to us," Treasury Secretary John Snow said at the New York Stock Exchange. "Lots of jobs are being created - the US economy has begun to take off."

Gross domestic product grew at a 3 per cent annual rate in the second quarter, after reaching 4.5 per cent the first three months of the year, the Commerce Department said last week.

The indexes for business activity, orders, prices and employment are adjusted for seasonal variations. All others are unadjusted. The survey's index of prices paid, a measure of costs for purchased materials and services, fell to 73.1 from a record 74.6 in June.

(China Daily 08/06/2004 page11)