Services Expand, Factory Orders Shrink

November 03, 2004
By Ros Krasny

CHICAGO (Reuters) - The U.S. services sector expanded in October at a faster rate than expected, but September factory orders dropped, sending mixed signals for the U.S. economy, reports showed on Wednesday.

A third report showed mortgage applications rose in the latest week as interest rates stayed low for many home-buyers.

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

Analysts' median forecast was 58.0. A reading above 50.0 denotes expansion in services, which account for some 80 percent of the U.S. economy and includes everything from airlines to banks and restaurants.

"This is obviously good news for the Fed 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 ISM survey's employment index rose to a new high of 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 less and four indicated employment was unchanged, ISM 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.

U.S. companies continue to deal with high prices for raw materials, especially energy.

But a report by the Commerce Department found September factory orders fell 0.4 percent when Wall Street had forecast them to rise 0.3 percent. Orders for August were also revised to show a 0.3 percent decline.

It was the first time since November-December 2002 that factory orders have dropped for two consecutive months, Commerce said.

Widespread troubles in the U.S. airline industry are spilling onto the factory floor. Civilian aircraft orders fell 16.3 percent after a 46.2 percent plunge in August.

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

Nomura's Jain looked for catch-up in factory orders over the next few months as companies rush to take advantage of bonus depreciation on equipment that expires at year-end.

Investors were arguably less focused on the day's economic reports and more driven by asset reallocation strategies after the U.S. presidential election.

Confidence that George W. Bush will prevail for a second term in the White House sent equities prices soaring, but hit the dollar and pushed Treasury bond prices down sharply.

Falling crude oil prices also supported stocks.

The Mortgage Bankers Association 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 percent for the week ended Oct. 29 to 761.7, driven by demand for new housing. The refinancing index rose just 3.1 percent.

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

"With fixed mortgage rates remaining well below 6 percent, home buying activity remains strong," said Stephen Wood, economist at Insight Economics. "Low mortgage rates and the housing market are still stimulating overall economic activity."

More Financial News