By Lucia Mutikani

WASHINGTON (Reuters) – U.S. services industry activity unexpectedly picked up in November, with employment rebounding, offering more evidence of underlying momentum in the economy as it braces for an anticipated recession next year.

The survey from the Institute for Supply Management (ISM) on Monday followed on the heels of news last Friday that the economy continued to create jobs at a solid clip in November, with wage growth accelerating. Consumer spending also rose strongly in October.

The flow of strong data raises the risk that the Federal Reserve will continue hiking interest rates and lift its policy rate to a higher level than the recently projected 4.6%, where it could stay for sometime. The U.S. central bank’s rate-hiking cycle is the fastest since the 1980s.

“While that’s good news for the growth outlook, it’s not so great for the Fed trying to dampen demand and ease inflation,” Priscilla Thiagamoorthy, an economist at BMO Capital Markets in Toronto, said of the data.

The ISM said its non-manufacturing PMI increased to 56.5 last month from 54.4 in October. It was boosted by a surge in business activity to an 11-month high. Comments from businesses included “gaining more business” and “demand for our services is increasing.”

Economists polled by Reuters had forecast the non-manufacturing PMI slipping to 53.3. A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of U.S. economic activity.

Economists shrugged off a survey from S&P Global confirming its services PMI was stuck in contraction territory in November.

“We see overall still-strong ISM services as a better indicator of real activity than the much lower S&P services PMI,” said Veronica Clark, an economist at Citi group in New York.

The Fed has raised its policy rate by 375 basis points this year from near zero to a 3.75%-4.00% range.

Thirteen services industries including construction, healthcare and social assistance, retail trade as well as professional, scientific and technical services reported growth last month. But information, wholesale trade and management of companies and support services reported a decline.

Companies in the construction industry reported that “new business requests are solid.”

Professional, scientific and technical services firms noted that though job openings continued to decrease, opportunity for growth remained “with demand for top talent still high and availability still rather scarce.”

Retailers reported business as “stable.” Wholesalers said “business volume appears to be leveling out based on a month-over-month comparison, although we are up significantly when compared to the same month last year.”

Finding workers remained a challenge for transportation and warehousing companies.

The solid economic data have raised optimism that the widely feared economic downturn in 2023 would be short and mild. Some economists are even betting that a recession could be avoided, with growth just slowing sharply.

The acceleration in services industry activity confirms that spending is shifting away from goods and that the inflation baton has been handed over to services, indicating that overall price pressures in the economy could take a while to subside.

Manufacturing activity contracted in November for the first time in 2-1/2 years, the ISM reported last week. Economists said a weighted average of the services and manufacturing PMIs was consistent with a 2% annualized economic growth pace this quarter. The economy grew at a 2.9% rate in the third quarter.

Stocks on Wall Street were trading lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.

SLOW INFLATION DESCENT

But the weakness in manufacturing, which accounts for 11.3% of the U.S. economy, is not yet evident in the so-called hard data.

A report from the Commerce Department on Monday showed factory orders jumped 1.0% in October after rising 0.3% in September. Economists had forecast orders advancing 0.7%. Orders shot up 12.8% on a year-on-year basis in October.

October’s jump in factory orders was driven by a 2.2% rise in bookings for transportation equipment, which followed a 2.3% increase in September. Transportation equipment orders were boosted by increases in orders for both defense and civilian aircraft. Motor vehicle orders rebounded 1.7%.

Orders for machinery rose 1.5%. There were also solid gains in orders for computers and electronic products as well as electrical equipment, appliances and components.

In November, the ISM’s measure of services industry employment increased to 51.5 from 49.1 in October. But with orders stagnating, further gains are likely to be limited.

The survey’s gauge of new orders received by services businesses dipped to 56.0 from 56.5 in October. Exports tumbled to the lowest level since April 2020, likely because of slowing global growth and a strong dollar.

A measure of prices paid by services industries for inputs slipped to 70.0 from 70.7 in October as supply continued to improve. The survey’s measure of services industry supplier deliveries fell to 53.8 from 56.2 in October.

A reading above 50 indicates slower deliveries. Businesses continued to whittle down the backlog of unfinished work.

“Even as we see a reprieve in goods prices, the slow descent in the larger services sector speaks to the fact that it will take time for inflation to return to target and that the Fed still has work to do in its fight against inflation,” said Shannon Seery, an economist at Wells Fargo in New York.

(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)

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