US services sector activity jumps to 12-1/2-year high

WASHINGTON – US services sector activity raced to a near 12-1/2-year high in January, buoyed by robust growth in new orders, the latest sign of strong momentum in the economy at the start of the year.

Economic growth is showing strength even before the stimulus from a $US1.5 trillion ($F3t) tax cut package, which came into effect last month, has started to filter through. That is causing concern that the economy could overheat.

The yield on the benchmark 10-year Treasury note has risen to a four-year high as investors anticipate a slightly faster pace of interest rate increases from the Federal Reserve than has been expected.

The US central bank has forecast three rate increases this year after raising borrowing costs three times in 2017.

The Institute for Supply Management’s (ISM) survey on Monday added to a report on Friday showing a pickup in job gains in January and the strongest annual wage growth in more than 8-1/2 years.

“All of this is before the actual effects of the tax cuts have had time to kick in,” said John Ryding, chief economist at RDQ Economics in New York.

“The combination of strong employment growth and rising cost pressures will keep the Fed on course for a rate hike in March and we continue to believe the Fed will hike four times in 2018.”

The ISM said its non-manufacturing activity index jumped 3.9 points to 59.9, the highest reading since August 2005.

A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of US economic activity.

New orders jumped 8.2 points to 62.7, the best reading since January 2011.

Services industry respondents tied the surge in orders to the tax cuts and the strengthening economy.

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