Slowdown in orders, hiring curbs U.S. services sector growth

By Lucia Mutikani
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An Airbus A321 is being assembled in the final assembly line hangar at the Airbus U.S. Manufacturing Facility in Mobile

An Airbus A321 is being assembled in the final assembly line hangar at the Airbus U.S. Manufacturing Facility in Mobile, Alabama September 13, 2015. REUTERS/Michael Spooneybarger

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. services industry activity cooled in October amid a slowdown in new orders and hiring, suggesting a moderation in economic growth early in the fourth quarter.

Other data on Thursday showed planned job cuts by U.S.-based employers dropped 31 percent to a five-month low last month. That underscored the labor market's healthy fundamentals, though more Americans filed for unemployment benefits last week.

The mixed reports came a day after the Federal Reserve offered a fairly upbeat assessment of the economy and signaled it could raise interest rates next month.

"While the services report was weak, it is not nearly weak enough to disrupt Fed plans to hike in December. It is consistent with a softer pace of economic growth," said Andrew Hollenhorst, an economist at Citigroup in New York.

The Institute for Supply Management (ISM) said its non-manufacturing index fell 2.3 percentage points to a reading of 54.8 percent in October. A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of the economy.

It said respondents' comments remained mostly positive about business conditions and the overall economy, but added that "several" had highlighted uncertainty about the impact of the Nov. 8 U.S. presidential election.

Services industries reported a slowdown in new orders and employment, as well as demand for exports.

The new orders sub-index dropped 2.3 percentage points to 57.7, while a measure of services sector employment decreased 4.1 percentage points to 53.1. A sub-index for export orders fell 1.0 percentage point last month.

Thirteen services industries including information, professional, retail and finance reported growth in October. The five industries reporting contraction included education, public administration and arts, entertainment and recreation.

The economy grew at a 2.9 percent pace in the third quarter after expanding at a 1.4 percent rate in the April-June period.

Separately, the Labor Department said on Thursday that initial claims for state unemployment benefits increased 7,000 to a seasonally adjusted 265,000 for the week ended Oct. 29, the highest level since early August.

It was still the 87th straight week that claims remained below 300,000, a threshold associated with a healthy labor market. That is the longest stretch since 1970, when the labor market was much smaller.

"U.S. jobless claims remain supportive of labor market improvement," said Michael Gapen, chief economist at Barclays in New York.

The Fed on Wednesday held interest rates steady but said its monetary policy-setting committee "judges that the case for an increase in the federal funds rate has continued to strengthen."

The U.S. central bank is widely expected to increase its overnight benchmark interest rate in December, but the decision could depend on the outcome of next week's election.

The tightening of the race between Democratic candidate Hillary Clinton and her Republican rival Donald Trump has rattled financial markets. The Fed raised borrowing costs last December for the first time in nearly a decade.

U.S. financial markets were little moved by the data, with traders focused on the race for the White House.

The dollar stabilized from multi-week lows against a basket of major currencies after a poll showed Clinton holding on to a narrow lead over Trump. U.S. stocks were a bit weaker, while prices for longer-dated U.S. government bonds fell.


Last week's claims report has no bearing on October's employment report, which is scheduled for release on Friday, as it falls outside the survey period.

According to a Reuters survey of economists, nonfarm payrolls likely increased by 175,000 last month after rising by 151,000 in September. The unemployment rate is seen slipping one-tenth of a percentage point to 4.9 percent.

Expectations of an upbeat October employment report were supported by a report on Thursday from global outplacement consultancy Challenger, Gray & Christmas showing employers announced 30,740 job cuts last month, down from 44,324 in September.

Job cuts in October were concentrated in the computer industry, where employers announced 4,792 layoffs. Most of the computer job cuts came from HP Inc, which laid off another 4,000 workers last month. That was in addition to the 30,000 job cuts the company announced in 2015.

In another report, the Labor Department said nonfarm productivity, which measures hourly output per worker, rose at a 3.1 percent annual rate, the fastest pace in two years. The increase ended three straight quarters of decline.

Despite the rise, the trend in productivity remains weak.

A fifth report from the Commerce Department showed new orders for manufactured goods increased for a third consecutive month in September. Unfilled orders at factories, however, fell for a fourth straight month.

Manufacturing, which accounts for about 12 percent of the economy, has been hurt by a strong dollar and weak global demand. Production has also been undermined by the collapse in oil drilling activity in the wake of the plunge in oil prices.

(Reporting by Lucia Mutikani; Editing by Paul Simao)