U.S. services sector activity surges to 11-month high

October 5, 2016 8:36 AM EDT

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By Lindsay Dunsmuir

WASHINGTON (Reuters) - U.S. services sector activity rebounded to an 11-month high in September, an encouraging sign for economic growth that may increase the prospect of a Federal Reserve interest rate hike this year.

The Institute of Supply Management (ISM) said on Wednesday its non-manufacturing activity index surged to a reading of 57.1, the highest level since October 2015. Last month's reading followed a disappointing drop in August.

Economists polled by Reuters had forecast the index rising to 53.0. A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of U.S. economic activity.

"These data help the case for the Fed tightening again before too long," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York.

Improvement in the index was broad-based with business activity and the employment sub-indices reaching 11-month highs.

It followed similarly upbeat news on Monday when ISM reported U.S. factory activity shrugged off weakness in August..

The dollar strengthened against a basket of currencies following the data on Wednesday. U.S. stocks were trading higher, while prices of U.S. Treasuries were largely weaker.

In a separate report, the U.S. Commerce Department said new orders for manufactured goods rose 0.2 percent in August, a second straight monthly increase following two months of weakness.

Economists had expected factory orders to rise 0.1 percent.

Core capital goods, seen as a measure of business confidence and spending plans, increased 0.9 percent.

The Atlanta Fed left its forecast for third-quarter GDP growth unchanged at a 2.2 percent annual rate after the data.

The U.S. central bank has indicated its baseline case is for a rate increase at the December policy meeting as long as the economy continues to strengthen. It grew a lackluster 1.0 percent during the first half of the year.

The Fed raised rates in December 2015, the first such move in nearly a decade, but has held them steady so far this year.

EYES ON PAYROLLS

Another report on Wednesday by a leading payrolls processor showed U.S. private employers added 154,000 jobs in September, slightly below economists' expectations. The more closely-watched monthly U.S. jobs report is scheduled for release on Friday.

The Commerce Department also reported earlier on Wednesday that the U.S. trade deficit rose more than expected in August as a jump in imports offset higher exports. The trade gap widened 3 percent to $40.73 billion.

Imports hit their highest level since September 2015 while exports were the highest since July of last year.

However, economists said the large gain in imports was partly due to a rise in intellectual property payments tied to broadcasting rights for the 2016 Summer Olympics in Rio de Janeiro.

(Reporting by Lindsay Dunsmuir; Editing by Paul Simao)



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