Service sector industries expand in March, signaling wider economic recovery

Service sector industries expanded in March at the fastest pace since May 2006, indicating that the U.S. recovery was spreading beyond manufacturing and starting to create jobs.

The Institute for Supply Management’s index of non-manufacturing businesses, which make up almost 90% of the economy, rose to 55.4 from 53 in February. Readings above 50 signal expansion.

A pickup in consumer purchases is benefiting companies such as cruise operator Carnival Corp. and electronics retailer Best Buy Co. and points to a broad-based expansion that may stimulate hiring. Sustained job gains on the heels of the biggest payroll increase in three years would lift incomes, giving households the wherewithal to keep spending, which accounts for about 70% of the economy.

“The recovery is looking increasingly self-sustaining,” said James O’Sullivan, chief economist at MF Global in New York. The economy is “broadening and gaining traction. It’s not booming but signaling fairly healthy growth.”

The pace of orders to service industries climbed to the highest level since 2005, while backlogs were the highest since August 2007, indicating that companies were having trouble keeping up with demand.

Employers increased payrolls by 162,000 workers last month, the third gain in the last five months and the biggest since March 2007, signaling that companies are becoming more confident the economy is healing, Labor Department figures showed Friday. The jobless rate was 9.7% in March for a third month.

Stocks rose and Treasury securities fell Monday after the reports. The Standard & Poor’s 500 index increased 0.8% to 1,187.44. The 10-year Treasury note declined, pushing up the yield to 3.99% from 3.94% on Friday.

Manufacturing grew in March at the fastest pace in more than five years, the supply managers’ group reported Thursday. The factory index rose to 59.6, the highest level since July 2004.

Monday’s report showed that the non-manufacturing gauge of new orders rose to 62.3, the highest since August 2005, from 55 in February, and unfilled orders increased to 55.5, the highest since August 2007.

The index of employment increased to 49.8 from 48.6. Although it still showed that more companies reduced payrolls than added to them, the gauge was the highest since April 2008.

The measure of new export orders jumped in March to the highest level since June 2007, while the index of prices paid rose to 62.9 from 60.4.

Categories in the services survey include utilities, healthcare, housing, transportation, and finance and insurance.

Service-producing companies added 82,000 workers to their payrolls in March, the third straight gain and the largest increase since November, the Labor Department’s data showed.