British business booms in July, U.S. services recover

By Steven C. Johnson and Andy Bruce

NEW YORK/LONDON (Reuters) - British businesses boomed and activity at euro zone companies expanded, albeit modestly, in July for the first time in 18 months, while growth in the U.S. services sector rebounded from a three-year low.

The data suggested economic recovery in the UK and U.S. economies was gathering steam, raising questions about the proper amount of monetary stimulus needed in those countries.

For the U.S. Federal Reserve, the rebound in the Institute for Supply Management's services index last month bolsters the central bank's case that the economy will strengthen in the second half of the year.

A surge in new orders helped the index hit 56 last month after slipping to 52.2 in June, a three-year low.

Whether that leads the Fed to begin slowing its $85 billion in monthly bond purchases next month is still an open question. While recent economic data has been mostly strong, the Fed unnerved some investors last week when it flagged low inflation and rising mortgage rates as potential growth risks.

"This ISM report on its own does little to shed light on what the Fed will do. But if you take a big picture, holistic view, which is what the Fed does, then you see that most of the data over the last month has beat expectations," said Tom Porcelli, chief U.S. economist at RBC Capital Markets. "That's consistent with the Fed staring to taper purchases in October."

One caveat might come from the index's employment component, which slipped to 53.2 from 54.7. U.S. employers slowed their pace of hiring across the economy in July, but the jobless rate fell anyway.

In Britain, the Markit/CIPS services PMI leapt to 60.2 in July from 56.9, its highest level since December 2006 and a bigger gain than forecast by any of the economists polled by Reuters. Readings above 50 denote expansion.

That could pose a challenge for the Bank of England. On Wednesday, Governor Mark Carney is due to say whether the BoE will go ahead with a policy of 'forward guidance' aimed at keeping down bond yields by promising low rates while the economy remains fragile.

"Coupled with the lead that we saw in the construction PMI and the pretty solid manufacturing PMI, all those indicators are suggesting the UK recovery is really gaining pace now," said Victoria Clarke, an economist at Investec.

It will take several months to determine whether the euro zone has finally turned the corner and put a lengthy recession behind it. But data company Markit, which compiled the euro zone surveys, said there was reason to hope.

Markit's composite euro zone PMI broke above the 50 growth threshold for the first time since January 2012. German business activity rebounded, while the downturns in the euro zone's next three biggest economies - France, Italy and Spain - eased.

These upbeat surveys followed mixed data from Asia. Chinese services companies had modest growth in July but activity at their Indian peers slipped for the first time in nearly two years.

The HSBC/Markit Purchasing Managers' Index for China's services industry, which ranges from hotels to banks, stood at 51.3 in July, unchanged from June and just a whisker above a 20-month low of 51.1 struck in April.

"China's service sector has stabilized at a relatively low level of growth," said Qu Hongbin, an economist at HSBC. "But profit margins continue to be squeezed. Without a sustained improvement in demand, services growth is likely to remain lackluster, putting downside pressures to employment growth."

(Editing by Dan Grebler)