Service sector boom puts US economy on track for strong second half of 2014

Capitol Hill United States

A surge in activity across the US services sector in July fuelled by spending on new homes put the economy on track for a strong second half of 2014, according to a business survey.

Businesses recorded growth rates only slightly below the previous month's record as the US continued to rebound from freezing weather in the spring that sent the economy's recovery into reverse.

But the Markit purchasing managers' index (PMI) contained warning signs that the 4% annualised GDP growth in the second quarter was unlikely to be maintained after service sector businesses reported a fall in confidence and a slowdown in job creation.

Meanwhile analysts also said a fall in service sector activity growth in China last month to a record low would dent confidence in the global economy's growth prospects and its ability to maintain recent rises in output during the second half of this year.

Chris Williamson, Markit's chief economist said the summer months could represent a peak in the rate of growth.

"The surveys indicate that the rate of job creation has waned, as have inflows of new business. Business confidence has also fallen to the lowest since late 2012 as companies have noted greater economic uncertainty and mounting risk aversion."

The US economy suffered in the spring after the country was blanketed in freezing snow, closing factories and cutting transport links. The bounce was rapid and revealed all major sectors recovered most of the lost output.

Policymakers at the Federal Reserve have hinted at an early rate rise should the momentum continue into the latter half of the year, but appear to be vindicated in their warnings that it is unlikely while the recovery remains bumpy.

China, the world's second largest economy, saw its services sector slow sharply in July to its lowest level in nearly nine years.

The HSBC/Markit China services PMI fell to 50 in July, the lowest reading since data collection began in November 2005, indicating a recovery in the broader economy is still fragile and may need further government support.

A reading above 50 indicates growth while a fall to 50 shows the sector stagnated in July.

Services, which account for about 46% of GDP and roughly half of all jobs in the country, have been one of the few bright spots in China's economy this year. Analysts said the sudden signs of weakness raised the question of whether Beijing will need to do more to shore up growth as well as consumer and business confidence.

Qu Hongbin, HSBC's chief economist in China, said: "The weakness in the headline number likely reflects the impact of the ongoing property slowdown in many cities as property related activity such as agencies and residential services see less business."

He added: "Today's data points to the need of continued policy support to offset the drag from the property correction and consolidate the economic recovery."

China's main stock markets fell on the news. The Shanghai Composite Index ended down 0.2% at 2,220. The CSI300 of the leading Shanghai and Shenzhen A-share listings lost 0.3%.

Some economists blamed a slowdown in the housing market for the weak reading, as property-related activities saw less business.

China Vanke, the country's biggest residential property developer, lost 2.1% of its value after posting July sales which showed a big drop from June. Poly Real Estate also slid 1.7%.

China's manufacturing sector has continued to expand after contracting last year, but with government support that has yet to reach the services sector.

Powered by Guardian.co.ukThis article was written by Phillip Inman, economics correspondent, for The Guardian on Tuesday 5th August 2014 20.03 Europe/London

guardian.co.uk © Guardian News and Media Limited 2010

 

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