US services sector growth accelerates; private payrolls rise solidly

US services sector activity jumped to a one-year high in February, suggesting strength in the economy before a recent escalation of recession fears ignited by the coronavirus epidemic that prompted an emergency interest rate cut from the Federal Reserve.

The economy's solid fundamentals were also underscored by other data on Wednesday showing private payrolls increased more than expected in February, in part as unseasonably mild weather bolstered hiring at construction sites and in the leisure and hospitality industry.

The Fed on Tuesday slashed its benchmark overnight interest rate by a half percentage point to a target range of 1.00% to 1.25%, in the US central bank's first emergency rate cut since 2008 at the height of the financial crisis. Fed Chair Jerome Powell said

"the coronavirus poses evolving risks to economic activity."

The Institute for Supply Management (ISM) said its non-manufacturing activity index increased to a reading of 57.3 last month, the highest level since February 2019, from 55.5 in January. A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of US economic activity. Economists polled by Reuters had forecast the index falling to a reading of 54.9 in February.

The ISM said services industries remained "positive about business conditions and the overall economy," but also noted that "most respondents are concerned about the coronavirus and its supply chain impact."

The fast-spreading coronavirus has killed more than 3,000 people and sickened at least 90,000, mostly in China. In the United States, nine people have died from the illness associated with the virus and the number of infections exceeded 100, raising awareness of the disease among Americans starting the last week of February.

Investors fear the coronavirus epidemic could derail the longest US economic expansion in history, now in its 11th year, through disruptions to supply chains and exports. The damage to the services sector is expected to come mostly through the transportation and tourism industries. Economists expect the coronavirus to restrain economic growth in the first half of the year to around 1.0%. The economy grew 2.3% in 2019.

Separately on Wednesday, the ADP National Employment Report showed private payrolls gained 183,000 jobs last month after rising by a downwardly revised 209,000 in January. Economists had forecast private payrolls increasing 170,000 in February following the previously reported 291,000 surge in January.

Labor market strength was reinforced by the ISM survey, which showed its measure of services industry employment increased to a reading of 55.6 in February from 53.1 in January. The ADP report, jointly developed with Moody's Analytics, was published ahead of the government's more comprehensive employment report for February scheduled for release on Friday.