U.S. Service Sector Grows but Factory Orders Decline

The huge U.S. service sector expanded in October at a faster rate than expected, but a surprising drop in September factory orders created mixed signals on the U.S. economy, reports showed Wednesday.

Another report showed that mortgage applications rose in the latest week as interest rates stayed comfortably low for many home buyers.

Economists said the strong service sector report boded well for Friday’s October employment numbers.

The Institute for Supply Management said its index of service activity jumped to 59.8 in October from 56.7 in September, ending a two-month skid.

Analysts’ median forecast was 58. A reading above 50 denotes expansion in the service sector, which accounts for about 80% of the U.S. economy and includes airlines, banks and restaurants.

“This is obviously good news for the [Federal Reserve] and for anybody else who is concerned about whether this recovery is sustainable,” said Tim O’Neill, chief economist at BMO Financial in Toronto.

The institute’s employment index rose to 55.8 from 54.6 in September, hinting that Friday’s October payrolls report could be on the strong side.

Ten industries reported more jobs, three reported fewer and four indicated employment was unchanged, the institute said.

“The October employment report should look healthier based on the employment index,” said Parul Jain, deputy chief economist at Nomura Securities International in New York.

Others fretted that the sharp rise in the prices-paid index, to 74.1 from 67.1, was a leading indicator showing troubles ahead for U.S. growth. Companies continue to deal with high prices for raw materials, especially energy.

Contrary to strength in demand for services, September factory orders fell 0.4%, to $368.3 billion, confounding Wall Street forecasts of a 0.3% increase. Orders for August were revised to show a 0.3% decline.

Wednesday’s numbers marked the first time since November-December 2002 that orders have receded for two consecutive months, the Commerce Department said.

Widespread troubles in the U.S. airline industry are leaking through to the factory floor. Civilian aircraft orders fell 16.3% after a 46.2% plunge in August.

Orders for durable goods -- items expected to last three years or more -- were up 0.2%.

Nomura’s Jain said there could be a catch-up in factory orders over the next few months as companies rush to take advantage of a so-called bonus depreciation on equipment that expires at year-end.

The Mortgage Bankers Assn. reported that new applications for home loans rose last week to the highest level since late April, even as mortgage rates rose.

The seasonally adjusted mortgage market index rose by 8.2% for the week ended Oct. 29 to 761.7, driven by demand for new housing. The refinancing index rose just 3.1%.

Mortgage interest rates remain lower than a year ago. The popular 30-year mortgage rate averaged 5.65% for the week, up 0.11 percentage point.