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U.S. service firms grow more slowly, hiring weakens

Published: Wednesday, April 3, 2013 9:18 a.m. CDT • Updated: Wednesday, April 3, 2013 1:23 p.m. CDT

WASHINGTON – U.S. service companies grew more slowly in March, while private employers pulled back on hiring, reports Wednesday showed. The declines suggest businesses may have grown more cautious last month after federal spending cuts took effect.

The Institute for Supply Management said that its index of non-manufacturing activity fell to 54.4 last month. That’s down from 56 in February and the lowest in seven months. Any reading above 50 signals expansion.

Slower hiring and a steep drop in new orders drove the index down. A gauge of hiring fell 3.9 points to 53.3, the lowest since November. That means companies kept hiring, just at a slower pace.

The ISM report covers companies that employ roughly 90 percent of the work force.

A separate report from payroll processor ADP also pointed to slightly weaker hiring in March. ADP said private employers added 158,000 jobs in March, down from 237,000 the previous month. Construction firms didn’t add any jobs after three months of solid gains.

Economists were not overly concerned with the weaker reports. Several noted that ADP’s figures are less reliable than the government’s more comprehensive jobs report, which comes out on Friday.

Still, most say the pace of hiring has almost certainly dropped off from the previous four months, when employers added an average of 200,000 net jobs a month. And a few reduced their forecasts for March job growth after seeing the two reports.

Jim O’Sullivan, chief U.S. economist at High Frequency Economics, now expects just 160,000 net jobs, instead of 215,000. Jennifer Lee, an economist at BMO Capital Markets, said her group has lowered its forecast to 155,000, down from 220,000.

Lee said businesses may have temporarily suspended hiring because they want to see the impact of $85 billion in government spending cuts, which began on March. 1.

“It appears that businesses aren’t seeing the impact (of the spending cuts) just yet but are obviously concerned about the economy going forward... and are thus holding back on orders or hiring,” Lee said in a note to clients.

Still, most economists say any slowdown is likely temporary. Most say growth accelerated in the January-March quarter to a 3 percent at an annual rate, buoyed by a resilient consumer and a steady rebound in housing.

And even if growth slows in the April-June period to roughly 2 percent, as some predict, that that would still leave the economy expanding at a solid pace in the first half of the year.

“For now, there is still a lot of good news on the economy,” said Paul Edelstein, an economist at IHS Global Insight. “Home construction and demand are growing, and jobs are being added.”

The ISM report measures growth in industries that range from retail and construction to health care and financial services.

Even with March’s decline in the service-sector growth, the index nearly matched its 12-month average of 54.5.

Fifteen of the 18 industries covered by the ISM survey reported expansion, including construction, transportation and warehousing, retail, finance and insurance, and utilities.

And other reports suggest consumers are still spending, despite an increase in Social Security taxes that has reduced take-home pay.

In February, consumer spending rose by the most in five months. And consumer confidence improved in March from the previous month, according to a survey released last week by the University of Michigan.

The housing recovery has also boosted home prices, which makes homeowners feel wealthier. That can also lead to more spending.

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