US services sector grows as Europe slumps

Growth in the vast US services sector quickened at its fastest pace in a year in February, suggesting the American economy continued to improve even as Europe veered toward recession. Meanwhile China cut its 2012 economic growth forecast on Monday and pledged to boost domestic consumer demand, with the central bank saying it would allow the exchange rate to fluctuate more widely.
---- Asian data slightly more upbeat, but China warns on growth
---- J.P. Morgan global total output index at year high
Overall though, global private sector activity grew at its fastest pace in a year last month as the strong improvement in the United States offset the drag from the eurozone, J.P. Morgan's Global Total Output index published on Monday showed. The global index rose to 56.5 in February from 54.5 in January, comfortably above the 50 mark that divides growth from contraction.
Markit's Eurozone Composite PMI, which gauges private sector activity across the economy, slipped to 49.3 in February, revised down from a preliminary reading of 49.7 and below January's reading of 50.4. The US services sector expanded at its fastest pace in a year in February, but new orders for factory goods dropped in January, data showed on Monday.
The Institute for Supply Management said its services index rose to 57.3 in February last month from 56.8 in January, besting economists' expectations for a drop to 56.1. It was the highest level for the index since February 2011 year in the services sector that accounts for about two-thirds of US economic activity. A reading above 50 indicates expansion for the index. The gauge of new orders improved to 61.2 from 59.4, while the employment index eased to 55.7 from 57.4. A separate report on Monday showed new orders for US factory goods dropped in January by the most in over a year. The Commerce Department said orders for manufactured goods fell 1.0 percent, not as much of a drop as the 1.5 percent decline economists were expecting. Still, it was the biggest decline since October 2010.
The private-sector HSBC China Services PMI, which provides a snapshot of conditions in businesses from restaurants to banks, climbed to a seasonally adjusted 53.9 in February from 52.5 in January, well above the 50 mark that demarcates expansion and contraction. "The world economy is gaining strength. The global PMI hit a one-year high in February, building on the gains of previous months, with momentum improving at both service providers and manufacturers," said David Hensley at J.P. Morgan. But that growth has come at a cost with prices rising at their fastest pace since May 2011, pushed up by escalating oil prices and an associated increase in transportation costs. American service sector firms, which account for more than two-thirds of US economic activity, grew at their fastest pace since February 2011 last month, according to the Institute for Supply Management. That extended a recent string of encouraging US economic data, and analysts said it was consistent with US economic expansion of around 2.0 percent a year.
"Nearly all the data are signalling underlying strength in the labour market," said Sam Wardwell, investment strategist at Pioneer Investments in Boston. "It is looking like the US economy is gathering a positive, self-building momentum."
The picture in Europe was different. Business activity in Spain and Italy slowed sharply, while data also showed growth slowed in Germany, the euro zone's largest economy, and stalled in France. That rekindled fear that the 17-country euro zone was headed for recession just as monetary policymakers were running out of new ways to boost growth.
With interest rates already at a record low 1.0 percent, the European Central Bank has extended more than one trillion euros of cheap, three-year loans to regional banks. But rather than lending that money out and boosting economic activity, banks appear to be hoarding it. Data shows they have more than 820 billion euros on deposit overnight at the ECB. "The most worrying development is the continued weakness of the southern European measures," said Ben May at Capital Economics.
Asian policymakers, however, have some flexibility. Should conditions worsen, central banks can reduce interest rates to stimulate economic growth. That's not an option in Europe or the United States, where borrowing costs are at or near zero. China announced a 50-basis-point cut in its bank reserve requirement ratio to 20.5 percent on February 18, releasing about 400 billion yuan that could be used for lending. It was the second 50-basis-point cut in the reserve ratio in three months.