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updated: 3/5/2013 11:58 AM

U.S. service firms grows at fastest pace in a year

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Associated Press

WASHINGTON -- U.S. service companies grew in February at the fastest pace in a year, buoyed by higher sales, more new orders and solid job growth. The gain suggests higher taxes have yet to slow consumer spending on services.

The Institute for Supply Management said Tuesday that its index of nonmanufacturing activity rose to 56 in February from 55.2 in January. Any reading above 50 indicates expansion.

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The report measures growth in industries that cover 90 percent of the workforce, including retail, construction, health care and financial services. A solid recovery in the housing market helped drive the index hiring.

Service firms also kept adding jobs last month. A measure of service-sector hiring fell only slightly after reaching a nearly seven-year high in January.

"This survey does bode well for both activity and employment in the second quarter," Paul Dales, an economist at Capital Economics, said in a note to clients.

The increase contributed to a strong day on Wall Street in which the Dow Jones industrial average was on pace to close at a record high. The Dow rose 147 points in midmorning trading to 14,275.

Thirteen of the 18 industries covered by the ISM survey reported expansion, including construction, real estate, finance and insurance, and utilities.

The growth suggests that Americans are spending more despite an increase in Social Security taxes that took effect on Jan. 1. The companies surveyed by the ISM cover many industries that are closely tied to consumer spending, such as retail, hotels and restaurants and arts and entertainment. The higher payroll taxes cost a household earning $50,000 about $1,000 a year; a household with two high-paid workers will have up to $4,500 less.

And those companies expect consumers to keep spending. Order backlogs grew at the fastest pace in 20 months, a sign that many firms can't keep up with rising sales. Stockpiles also rose strongly.

Anthony Nieves, the chair of the ISM's survey committee, said the increases in both categories point to higher future sales.

"Companies are gearing up for more volume, more activity," Nieves said.

The report also points to continued growth in hiring at service companies last month. Labor Department figures show service firms and construction companies have added an average of 195,000 jobs from November through January. The ISM includes construction hiring in its service index; the Labor Department measures those jobs separately from service hiring.

The government will release the February employment report on Friday.

There have been other signs the American consumers is not deterred by higher taxes. Auto sales rose slightly in February after jumping the previous month. And measures of consumer confidence rebounded after plunging at the end of last year.

The ISM reported last week that its separate index for manufacturing rose to its highest level since June 2011, driven higher by increases in new orders and production. That suggests manufacturing could boost growth this year after slumping in 2012.

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