US services sector, factory data point to solid economic growth

Services activity hit 8-1/2-year high last month

US services sector activity hit an 8-1/2-year high last month and factory orders surged in June, bolstering expectations of solid economic growth in the third quarter.

The Institute for Supply Management said on Tuesday its services index rose to 58.7, the highest level since December 2005, from 56.0 in June, with new orders reaching their highest level since August 2005.

A reading above 50 indicates expansion in the sector.

In a separate report, the Commerce Department said orders for manufactured goods increased 1.1% after a 0.6% decline in May. Economists had forecast new orders received by factories rising only 0.6%.

US stocks held losses after the unexpectedly better ISM and factory orders data, while the US dollar extended gains against a basket of currencies. Yields on US 10-year and 30-year Treasuries touched session highs after the data.

Manufacturing is expanding strongly, helping to keep the economy on solid ground. A survey last Friday showed new orders at the nation's factories surged in July.

Automobile production is also accelerating. But businesses amassed huge piles of stocks in the second quarter, which they will probably need to work through before placing more orders.

That could take some edge off factory activity and overall economic growth. The economy grew at a 4.0% annual pace in the April-June period, and growth estimates for the third quarter are currently around a 3% rate.

Orders excluding the volatile transportation category jumped 1.1% in June, the largest increase since July of last year, as bookings for primary metals, machinery and electrical equipment, appliances and components rose. Orders for computers and electronic products also increased.

Unfilled orders at factories rose 1.0%. Order backlogs have increased in 14 of the last 15 months.

The Commerce Department also said orders for durable goods, which are manufactured products expected to last three years and more, rose a sturdy 1.7% in June instead of the 0.7% rise reported last month.

Durable goods orders excluding transportation surged 1.9% instead of the previously reported 0.8% advance.

Orders for non-defense capital goods excluding aircraft - seen as a measure of business confidence and spending plans - increased 3.3%. The so-called core capital goods data was previously reported to have increased 1.4%.

The factory orders report showed inventories rose 0.3% in June, slowing from May's 0.8% gain. Shipments rose 0.5% after slipping 0.1% in May. The inventories-to-shipments ratio was unchanged at 1.31.