U.S. Service Sector Growth Surged in January

• The ISM non-manufacturing index jumped to 56.8 from 53.0 in December 2011resenting its highest level since last February.
• The "business activity" and "new orders" components each surged to 10-month highs of 59.5 from 59.4, respectively.
• After contracting in December 2011, the "employment" index vaulted to its highest level in almost six years at 57.4.

The ISM non-manufacturing index showed that the service sector expanded in January 2012 and that the pace of growth accelerated sharply as indicated by the gauge rising to 56.8 from 53.0 in December 2011 (a reading above 50 indicates that the sector is generally expanding; higher readings indicate a faster pace of growth). This represented the highest level for the index since last February and was well above market expectations for a modest increase in the January measure to 53.2.

The details of the report mirrored the solid headline. "Business activity" and "new orders" each jumped to a 10-month high in January at 59.5 and 59.4, respectively (up from 55.9 and 54.6, respectively in the previous month). Perhaps most encouraging, the "employment" component surged by 7.6 points to 57.4, which is its highest level since February 2006 and a stark turnaround from last month's reading that indicated service-sector employment contracted. Rounding out the main components of the report, the "supplier delivery" measure declined to 51.0 from 51.5 in December to indicate that delivery times from suppliers were modestly faster than in the previous month, although still slow (supplier delivery times tend to lengthen when capacity is being constrained).

January's ISM manufacturing and non-manufacturing surveys indicate that the US economy picked up speed at the start of the new year as the composite index touched a 10-month high of 56.5. Moreover, the gains within the "new orders" components of each measure suggest that this upward growth momentum may well be sustained during the coming months. The reported surge in service-sector employment corroborates the non-farm payroll report released earlier this morning that showed solid broad-based gains. On the whole, today's reports are encouraging and provide indications that the recovery of the US economy may finally be picking up its pace; however, despite the improvement in labour market conditions, the unemployment rate remains well above the Fed's ‘target' range of 5.2% to 6.0%, thereby making it likely that the current highly accommodative policy stance will remain in place for the foreseeable future.