By Joe Richter and Robert Willis
Dec. 5 (Bloomberg) -- The U.S. economy will keep expanding with a growing labor market and little inflation pressure from wages, reports today showed.
The Institute for Supply Management's index of service companies, which make up almost 90 percent of the economy, showed a reading of 54.1 in November. That's down from 55.8 the previous month, while still recording growth. ADP Employer Services said firms added 189,000 jobs, more than triple the amount analysts anticipated, and the Labor Department said worker productivity was greater in the third quarter than initially estimated.
Treasury notes fell and stocks rose after the figures eased concern that the U.S. is heading for recession and diminished traders' expectations for a half-point interest-rate cut by the Federal Reserve next week.
``It's time for the people who are telling this recession story to put up or shut up in terms of the data,'' said Robert Stein, senior economist at First Trust Advisors LP in Lisle, Illinois, and a former Treasury deputy assistant secretary for macroeconomic analysis. ``If you look at the labor market, if you look at consumption, nothing is falling off a cliff in the way you generally see at the beginning of a recession.''
The projected gain in private payrolls in November compared with 119,000 in October, ADP said. The figures spurred some economists to lift their estimates for the government's job report in two days. Fed officials including Chairman Ben S. Bernanke have flagged the importance of the Labor Department's release for their Dec. 11 meeting to set rates.
The yield on the benchmark 10-year Treasury note was 3.94 percent at 4:47 p.m. in New York, up 4 basis points from late yesterday.
Futures prices indicated a 42 percent chance of a half-point Fed rate cut on Dec. 11, down from 52 percent earlier today. The Standard & Poor's 500 stock index gained 1.5 percent to 1,485.01.
Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., wrote on his Web site today the Fed may have to lower the rate below 3 percent next year to ``restart a near recessionary economy.'' His forecasts have a checkered history: he said in May 2005 the Fed would stop raising rates at 3.25 percent. By June 2006, the rate was 5.25 percent.
A separate report from the Labor Department showed worker productivity accelerated more than forecast in the third quarter, causing labor costs to drop by the most in four years. Productivity, a measure of employee efficiency, rose at an annual rate of 6.3 percent, the most since 2003, the department said.
Lehman Brothers Holdings Inc. economists raised their forecast for the Labor Department's report to a gain of 125,000 jobs, from 90,000. The median estimate of economists surveyed by Bloomberg News before today's figures was 70,000, down from 166,000 in October.
The ADP report ``is still inferior in most estimating methodologies to that of the Bureau of Labor Statistics estimate which will come out on Friday,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. ``We have seen instances where the two surveys were vastly at odds.''
The ISM measure was projected to slip to 55, the median forecast in a Bloomberg News survey of 71 economists. Estimates ranged from 51.5 to 56.4. The index has averaged 57.7 since its inception in July 1997.
``I don't think it should be a surprise that outside manufacturing things are turning down, given all the problems in the financial markets and downside in construction,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. At the same time, ``if we're still creating jobs, then we're supporting the consumer.''
Declining home construction and defaults on subprime mortgages are taking a toll on retailers, wholesalers and financial firms. The institute's index of new orders for non- manufacturing industries fell to 51.1, the lowest since April 2003, from 55.7 the prior month.
Consumers, whose spending accounts for more than two-thirds of the economy, are becoming more frugal in the face of falling home values, rising gasoline bills, and dimmer prospects for jobs and earnings growth. Commerce Department figures showed that consumer spending and incomes rose less than economists forecast in October.
Comcast Corp., the biggest U.S. cable-television provider, yesterday cut its 2007 forecasts for sales, new customers and cash flow. Cable and satellite companies are attracting fewer new subscribers because of a slump in housing construction and rising foreclosures, analysts said.
Cablevision Systems Corp. and EchoStar Communications Corp. also blamed the economy after missing analysts' estimates for new subscribers in the third quarter.
Productivity at non-financial corporations, a measure watched by former Fed Chairman Alan Greenspan, climbed at a 4.2 percent rate in the third quarter, compared with 2.1 percent the previous three months.
Among manufacturers, productivity increased at a 5 percent pace in the last quarter, compared with a gain of 2.4 percent.
The third-quarter increase in productivity reflected the pickup in economic growth. The economy expanded at a 4.9 percent rate last quarter, the most in four years, according to a Commerce Department report last week.
That pace will not be sustained in the current quarter as consumer spending slows, most economists say. Peter Kretzmer, senior economist at Bank of America Corp., is forecasting growth of 0.1 percent in the fourth quarter. That is also likely to pull productivity down.
Abby Joseph Cohen, the Goldman Sachs Group Inc. strategist whose call for a year-end rally in U.S. stocks hasn't come true, yesterday predicted the Standard & Poor's 500 Index will rise 14 percent by the end of next year. Economists at Goldman see the economy growing at just a 1 percent pace through the middle of 2008.