Manufacturing sector grows faster in September (Reuters)

WASHINGTON (Reuters) – Factories grew more quickly in September as production and hiring increased, suggesting that manufacturing would help keep the economy from slipping into a new recession.

Other data on Monday offered more good news for the troubled U.S. economy, with strong demand for new motor vehicles putting sales on track to surpass August's rate, and construction spending unexpectedly rebounding in August.

"That hardly sounds like an economy flat on its back. The economy is still moving forward. But no one should confuse direction with speed," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

September marked the 26th straight month of expansion in a sector that has shouldered the broader economic recovery, and the factory report implied that an outright contraction in output would probably be avoided.

The Institute for Supply Management said its index of national factory activity rose to 51.6 last month from 50.6 in August, boosted by a rebound in production and increased factory hiring. But new orders fell for third month.

Economists had expected the index to edge down to 50.5. A reading above 50 indicates expansion in manufacturing.

The data was eclipsed in financial markets by Greece's admission that it would miss its deficit target this year, which weighed on stocks worldwide. Prices of U.S. Treasury debt rallied, while the dollar rose against a basket of currencies.

Europe's worsening debt crisis has left the U.S. economy on the edge of a new downturn. The economy grew at a 1.3 percent annualized rate in the second quarter, an improvement from the 0.4 percent in the January-March period.

The growth in U.S. manufacturing is bucking a global trend. Factory activity in Europe and Asia slumped in September to levels not seen since the depths of the financial crisis as export demand dropped.

The Global Manufacturing PMI, compiled by JPMorgan with research and supply organizations, contracted for the first time in over two years.

VEHICLE SALES, CONSTRUCTION SPENDING STRONG

The Federal Reserve last month announced a new measure designed to push long-term borrowing costs lower by shifting assets on its balance sheet to help the tentative economy.

Last week, Fed Chairman Ben Bernanke said the U.S. central bank might need to ease monetary policy further if inflation or inflation expectations fell significantly.

For now, indications are that the economy will avoid a recession and remain on a slow growth track, even as weak incomes constrain consumer spending -- the main engine of growth.

But households were more willing to spend on motor vehicles last month. Reports so far from General Motors, Chrysler and Volkswagen suggest sales could be about 8 percent higher than August's on a seasonally adjusted annualized basis.

A separate report from the Commerce Department showed an unexpected rebounded in construction spending in August as outlays on state and local government building projects rose sharply.

Construction spending rose 1.4 percent to an annual rate of $799.15 billion, the Commerce Department said. Economists had forecast a 0.3 percent drop.

"Spending should rise in the third quarter as a result of post-(Hurricane) Irene repairs. Construction is set to add to GDP growth in third and fourth quarter but the sector is still very weak," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

Spending on non-residential structures rose in the second quarter at its quickest pace since the third quarter of 2007.

Data last week showed that cash-rich U.S. businesses continued to invest in machinery, a trend that economists expect to hold and keep the economy expanding.

Manufacturing accounts for about 12 percent of gross domestic product and almost 11 percent of nonfarm employment.

The tenor of the ISM manufacturing report was strengthened by an increase in hiring last month, which could be a good omen for Friday's employment report.

The economy failed to add jobs in August, leaving the unemployment rate at a lofty 9.1 percent.

Other details of the factories survey showed production rebounded last month after contracting in August. However, new orders contracted for a third straight month, potentially pointing to a pullback in manufacturing in the months ahead.

"The main concern going forward would be if new orders didn't pick up," said Bradley J. Holcomb, chair of the ISM manufacturing business survey committee in Dallas, Texas.

But inventories are growing at a slower pace and the ISM viewed customers' supplies as too low, which should boost future orders. In addition, orders for exports rose and suppliers are taking a little bit longer to make deliveries to manufacturers, which is also a good sign.

(Additional reporting by David Lawder in Washington, Ellen Freilich in New York and Bernie Woodall in Detroit; Editing by Dan Grebler)

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Service sector picks up, jobs still a worry (Reuters)

By Steven C. Johnson Steven C. Johnson – 54?mins?ago

NEW YORK (Reuters) – The dominant services sector picked up steam unexpectedly last month, snapping a three-month streak of slower growth, though the pace of hiring eased slightly, underscoring broader job market concerns.

The surprise jump in the Institute for Supply Management's non-manufacturing index was cause for some encouragement, analysts said, as it suggested consumers were holding up better than thought in what appears to be a stalling U.S. economy.

Yet it probably will not be enough to relieve pressure on President Barack Obama to spur more job creation. Obama is due to detail a new jobs plan in a national speech on Thursday.

Last week, government data showed the economy added no new jobs in August, leaving the jobless rate at or above 9 percent for a fifth consecutive month.

"The unexpected rebound (in the ISM report) will help to ease recession fears following last week's news that payroll employment stagnated," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

But he said the ISM reading of 53.3 in August, while up from July's 17-month low of 52.7, "is consistent with only muted economic growth of about 1.5 percent."

Economists polled by Reuters had expected a 51.0 reading. A reading above 50 indicates expansion.

While new orders rose, suggesting continued demand, the employment index slipped to 51.6, its lowest since September 2010, underscoring the difficulties facing the roughly 14 million Americans who are out of work.

Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York, said the ISM employment reading indicates payroll growth "of only about 50,000," well below what would be needed to make a dent in the jobless rate.

He also warned that the report is "little more than a lagging indicator of the rate of growth of core retail sales, which have held up well in recent months."

"There are signs that the economy continues to be under stress," Lockheed Martin Corp Chief Executive Robert Stevens said on Tuesday.

Speaking at the Reuters Aerospace and Defense Summit in Washington, Stevens cited high U.S. unemployment and weak economic growth. But he added, "It's not clear to me whether that conveys a sense of a double-dip recession."

ALL ABOUT JOBS

The poor U.S. jobs outlook, along with a prolonged debt crisis in Europe, helped spark a stock market sell-off last month that has battered business and consumer confidence.

That has increased pressure on the Obama administration, particularly with the 2012 election just over a year off.

"Jobs growth is far below the level needed to bring the unemployment rate lower on a sustained basis," said Michael Woolfolk, currency strategist at BNY Mellon in New York.

Political clashes over the U.S. budget and debt burden, which led Standard & Poor's to strip the country of its AAA credit rating, also unnerved investors and consumers alike.

Stocks pared some losses Tuesday after the better-than-expected report but were still down more than 1.5 percent, while buying of safe-haven U.S. government debt faded slightly.

EUROPE, ASIA STRUGGLE, FED IN FOCUS

Firmer growth in the U.S. service sector was at odds with readings from beyond U.S. borders. Data on Monday showed service sector growth slowed sharply in the euro zone, Britain and China, boosting fears of global recession.

If the United States, the world's largest economy, can keep out of recession, that outlook may improve, analysts said.

Wall Street increasingly expects the Federal Reserve, which already warned it may hold interest rates near zero until 2013, to pour more money into the financial system to boost growth.

"At the margin, (Tuesday's ISM data is) an argument against any further accommodation at this point, but this doesn't necessarily countervail the whole bulk of the other data," said Bill Jordan, economist at Ried Thunberg, a unit of ICAP.

Fed Chairman Ben Bernanke is scheduled to speak in Minnesota on Thursday about the U.S. economic outlook. The Fed's entire policy-setting committee will meet September 20-21.

(Additional reporting by Mike Miller in Washington and Emily Flitter in New York; Editing by James Dalgleish)

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World growth at risk as service sector slows (Reuters)

LONDON/WASHINGTON (Reuters) – Growth in much of the world's service sector was anemic in July as firms around the world worried about the debt crisis in Europe and the U.S. as a well as slowing consumer demand, business surveys showed on Wednesday.

World stocks tumbled, with the U.S. S&P 500 stock index falling to a new low for the year as worries grew that fiscal cutbacks and stagnating output would prolong a global economic slowdown and aggravate Europe's debt crisis.

The vast U.S. services sector expanded at its weakest pace since February 2010, with an index from the Institute for Supply Management falling to 52.7 in July from 53.3 in June. Employment conditions also weakened, boding poorly for a closely-watched U.S. jobs report on Friday.

A report on private payrolls from ADP on Wednesday showed 114,000 new jobs were created last month, but economists believe the official government figures due Friday will show a gain of only 85,000 in total payrolls following two dismal months.

"The U.S. economy is stagnating," said Greg Salvaggio, senior vice president at Tempus Consulting. "Clearly the job outlook is deteriorating right now."

Published the day after a deal on a U.S. fiscal package, the surveys followed figures on Monday which painted no brighter a picture for the global manufacturing sector.

In Europe, the dominant services industry was also under pressure last month, growing at the slowest pace in nearly two years.

The 17-nation euro zone's services PMI slid to 51.6 as Germany and France, the continent's two largest economies which had propped up the tepid growth, saw their indexes slip closer to the 50 point mark that divides growth from contraction.

ITALY AND SPAIN SLOW

Italy's contraction deepened while Spain slipped into negative territory and both countries faced pressures in financial markets.

Italian service sector activity contracted in July for the second month running and business expectations were the lowest for over two years, while Spain's index fell to 46.5 from 50.2 in June.

"Italy and Spain softening is to be expected due to nerves but it makes the fiscal challenge facing them look even more difficult, particularly if we see the numbers stay around these levels for several months," said Victoria Cadman, economist at Investec.

Markets are squarely targeting Italy, the euro zone's third-largest economy, concerned by its weak growth and political instability. Prime Minister Silvio Berlusconi is due to speak to parliament to try and calm fears that have led the country to the edge of a Greek-style financial crisis. [ID:nL6E7J30LE]

Italy's economy would be too big for the euro zone's existing rescue funds to bail out and the turbulence has caused alarm across the euro zone and beyond.

Despite the slew of weak data from across the euro zone, the European Central Bank raised interest rates by 25 basis points to 1.5 percent last month, the second such increase this year, but is now seen holding steady until the fourth quarter.

The ECB aims to keep inflation, which was at 2.5 percent last month, just below 2.0 percent. The composite output price index eased to a six-month low of 53.0 from June's 53.9, suggesting firms were holding back on price rises.

"Disappointing economic data on both sides of the Atlantic, as well as surging Italian and Spanish bond yields, has seen risk appetite plummet as pessimism about the global recovery starts to take hold with a vengeance," CMC Markets analyst Michael Hewson said.

Britain surprised markets with its service sector growing at a four month high on strong growth in new business.

CHINA BRAKES

China's fledgling services sector grew in July at its slowest in three months as new orders ebbed, in the latest sign that tight monetary policy is reining in the world's second-biggest economy.

"Service sector activity growth moderated in July, reflecting the effect of monetary tightening and property cooling measures," said Qu Hongbin, an economist at HSBC.

Beijing has raised interest rates five times since October and lifted the deposit reserve requirement ratio nine times but in India, where the central bank has also tightened policy, service sector growth was at a three-month high.

(Editing by Clive McKeef)

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New Greek aid package awaits private sector buy-in (Reuters)

ROME/FRANKFURT (Reuters) – International bankers and European Union officials made no progress on Thursday in securing a private sector contribution for a second bailout of Greece and bond yields climbed on concern about the scheme.

The managing director of the Institute of International Finance (IIF), a group representing around 400 banks and financial organizations, met representatives from the European Central Bank, the Greek government and the euro zone in Rome to try to break a deadlock over how private creditors might voluntarily maintain their exposure to Greek sovereign debt.

It was the latest in a series of meetings in recent weeks, but there is little sign of the parties reaching a deal. Thursday's meeting, which explored a possible buyback of Greek debt, broke up with no conclusion.

To avoid a debt default by Greece, euro zone finance ministers are trying to put together a second international bailout by mid-September. A private sector debt rollover, in which investors would buy new Greek bonds as existing ones matured, is an important part of the new rescue plan.

Until Thursday, efforts had focused on a French proposal to roll over up to 70 percent of Greek debt maturing before the end of 2014, with a portion of that going into new 30-year Greek bonds that would be guaranteed by other AAA securities.

But attention has now shifted to the possibility of buying back Greek debt, or switching existing Greek bonds for longer-dated ones, which could trigger a default.

In a statement, the IIF said participants had discussed "debt buy-back approaches," but did not go into details.

Reflecting fading hopes for a breakthrough, one banking source commented before the meeting: "The circus moves to Rome."

Partly because of the insistence of the European Central Bank, governments and banks have been trying to put together a debt rollover that would not prompt credit rating agencies to declare a default -- even a limited or "selective default." But that is proving very difficult.

Asked about such a possibility at a news conference after the ECB raised euro zone interest rates by a quarter of a percentage point to 1.5 percent, President Jean-Claude Trichet said: "We say 'no' to selective default or credit event."

Dutch Finance Minister Jan Kees de Jager told a Dutch newspaper on Thursday that if pressure needed to be put on the private sector to ensure its involvement was substantial, then that would just have to be done, despite the implications.

"I think we need to accept that a voluntary contribution is not realistic," he told Het Financielle Dagblad. "If a compulsory contribution from the banks leads to a short and isolated (credit) rating event, then that is not so bad."

BOND YIELDS RISE

Yields on government bonds of indebted euro zone states rose to euro-era highs on Thursday because of concern that any scheme to have private investors pay in a rescue of Greece could be applied to the debt of other countries too.

Portuguese two-year bond yields rose more than a percentage point after rising by more than 4 percentage points on Wednesday following Moody's downgrade of Portuguese debt to "junk." Irish 10-year bond yield jumped more than 0.7 percentage point to 13.42 percent. The euro weakened marginally to 1.4280.

In Frankfurt, the ECB said its rate hike was aimed at curbing inflation, but the move will also increase borrowing costs and pressure on banks in Greece, Ireland and Portugal, as well as other at-risk euro zone states such as Spain.

Trichet said the bank had decided to suspend Portugal's requirement to post collateral for credit operations, a move to soften the burden on Lisbon.

Despite pressure on Spain, Madrid showed it could still fund itself in the markets at affordable rates, attracting strong demand on Thursday for 3 billion euros of three- and five-year bonds, helped by Spanish banks which traditionally purchase their own country's debt.

BAILOUT

The next bailout of Greece, which follows agreement in May 2010 on 110 billion euros of emergency loans, is expected to total around 115 billion euros ($164 billion) and aim to fund Athens until late 2014, when it should return to markets.

Of the total, euro zone governments want the private sector to provide 30 billion euros via the debt rollover. Greece itself would provide a further 30 billion euros to the package by selling state assets, and the remainder would come from the EU and the International Monetary Fund.

Euro zone finance ministers will discuss the outlines of the new plan in Brussels on July 11, but no firm decisions are expected because the private sector's role remains unclear.

In Berlin, Jean-Claude Juncker, the chairman of the 17-member Eurogroup, added his voice to criticism by EU leaders of ratings agencies following Moody's downgrade, saying he favored the creation of a European credit ratings body.

Michel Barnier, the European commissioner for financial regulation, has suggested the licenses of ratings agencies operating in Europe could be revoked if they don't adhere to new, stricter EU rules on their operations.

(With additional reporting by Frankfurt bureau, DeepaBabington in Rome, Martin Santa in Bratislava; writing by LukeBaker; Editing by Andrew Torchia/Ruth Pitchford)

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