After taking a breather, US service sector expansion picks up pace in October

The Institute of Supply Management (ISM) non-manufacturing index advanced by 2.2 points to 59.1 in October, delivering the first monthly increase since July. The print was handsomely above the consensus forecast, which called for a mild retreat to 56.5 from 56.9 posted in September.

Details of the report were also encouraging, as seven of the subcomponents rose on the month. Following substantial declines in the prior month, both new orders (+5.3 points to 62.0) and business activity subcomponents (+2.8 points to 63.0) rebounded strongly in October. The employment and prices paid subcomponents also edged higher, increasing by 0.9 points and 0.7 points, respectively. Despite the latest gain, disinflationary pressures continue to weigh on the prices paid subcomponent, which remains the only index subcomponent stuck in contractionary territory, albeit slightly.

Both export (+2.0 points to 54.5) and import orders (+1.5 points to 54.5) also improved in October.  Backlog of orders was flat on the month, while inventory sentiment (-2.0 points to 63) and supplier deliverables (-0.5 points to 52.0) posted declines.  

Of the 18 non-manufacturing industries surveyed, 14 reported growth in October (up from 13 in the month prior). Performance was unchanged in three industries, while mining was the only industry to report a contraction.

This is undeniably a strong report, with the ISM non-manufacturing index delivering broad-based gains after two consecutive monthly declines. Unlike its manufacturing counterpart the non-manufacturing index remains firmly in expansionary territory, demonstrating the resilience of the U.S. economic recovery. It also highlights the ongoing divergence between the externally-exposed manufacturing sector and the relatively insulated services sector, with the difference between the two widening to 9.0 points in October - the largest gap since December 2000. Having said that, the non-manufacturing sector is not entirely immune to global headwinds with the slowdown in the mining industry being a case in point.

To some degree, businesses sentiment in the previous two months could have been adversely affected by fiscal uncertainly which hung over the economy. As such, the recent budget deal should help alleviate those concerns. Modest spending increases and fiscal stability will help to shore up business confidence, especially among government contractors and public administration agencies, helping to support economic growth.

"Service sector employment has been relatively weak over the past two months. Gain in the employment subcomponent, which rose for the second time in as many months, is therefore an encouraging sign ahead of Friday's nonfarm payroll report, suggesting some upside for hiring relative to the 167k increase posted in September. Given where we are in the recovery, payrolls are unlikely to top 200k+ on a consistent basis, but even a print in the 150k to 200k range should help reassure the Fed that the U.S. economic recovery remains on track", says TD Economics.