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Service sector expands in April

Published May 4, 2006

WASHINGTON - America's service sector expanded with gusto and the country's factories saw orders shoot up by the largest amount in nearly a year, fresh evidence the economy was pushing ahead at a good clip into the spring.

The Institute for Supply Management reported Wednesday that its index of service sector activity stood at 63 in April, up from 60.5 in March. A reading of 50 or higher points to a growing service sector, while a figure below 50 signals contraction. April's showing was better than the reading of 59.2 analysts were forecasting.

"Services industries kicked off the second quarter with very impressive momentum," said Brian Bethune, an economist at Global Insight.

Fourteen of the 17 service sectors the institute's index measures showed increased activity in April.

In a second report, the Commerce Department said new bookings placed with manufacturers jumped by 4.2 percent in March, a notable gain from the 0.4 percent increase registered in February.

The 4.2 percent gain was the best showing since last May, when factory orders rose by the same amount. The performance was far better than the 1.5 percent rise economists were forecasting.

The latest snapshot of factory activity showed the strength seen in March was fairly broad-based.

Orders rose for a wide variety of "durable" goods, including commercial aircraft, machinery, metals, cars and computers. Demand also picked up for "nondurables," including food products and apparel.

"This robust report suggests that the vigorous pace of factory activity ... may not moderate significantly in the near term," said Michelle Girard, an analyst at RBS Greenwich Capital.

Orders placed for all durable goods - costly manufactured products expected to last at least three years - went up by 6.5 percent in March. That was up from 3.5 percent in February and was the largest increase since last May.

New bookings for nondurable items increased by 1.5 percent in March, a turnaround from the 3.1 percent drop reported for February.

Wednesday's factory report comes on the heels of other data showing factories were humming heading into the spring.

The economy is carrying strong momentum despite rising energy prices and interest rates.

For the first quarter, the economy grew at a 4.8 percent pace, the fastest in 2½ years, the government reported last week. A big pickup in consumer spending figured prominently in the strong showing.

In the April-to-June quarter, economic growth is expected to slow to the 3 percent range, which would be healthy, as consumers moderate their spending.

With oil and gasoline prices surging, some economists fret that inflation could flare up. And some recent inflation readings have suggested as much.

To thwart inflation, the Federal Reserve is expected to boost a key interest rate to 5 percent at its meeting Wednesday.

After May, many economists think the Fed will move to the sidelines for a while to assess how its rate increases are affecting economic activity.

Others, however, predict the Fed will be forced to push up its key rate to 5.50 percent in the months ahead to prevent inflation from taking off.

[Last modified May 4, 2006, 08:47:05]

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