U.S. services sector needs housing recovery
A pickup in the services sector, which accounts for about two-thirds of the U.S. economy and 80 per cent of the private sector jobs, is critical for the economic recovery.
The manufacturing sector has provided much of the thrust to the economy so far and its strength has begun to spill over into the service sector, according to economists with Scotia Capital Inc.
What are the expectations?
However, the release of the 's non-manufacturing composite index on Wednesday is forecast to show a decline in the service sector to 53 in July from 53.8 in June, according to a survey of economists by Bloomberg. The index reached a four-year high of 55.4 in the spring. A number over 50 indicates the sector continues to expand.
The recent weakness is expected to reflect both the layoff of workers who were hired to undertake the U.S. census and the continued depressed state of the U.S. housing industry, economists say. Housing-related services include real estate agents, lawyers, architects, mortgage brokers and bankers.
The service sector is still growing, but that rate is likely to slow, said Paul Dales, the U.S. economist for Capital Economics Ltd.
Just when the U.S. consumer will resume spending on housing remains to be seen. Lately, consumers have opted to save rather than spend. The U.S. savings rate was 6.4 per cent in June, the highest level since 1993, although those savings can be used either to pay down debt or support spending, he said.
"U.S. households are carrying an equivalent 130 per cent of their disposable income in debt," Mr. Dales said. "We think a more sustainable level is 100 per cent. ... It will be a long and drawn-out process. We are talking years rather than months." He estimates that it could take three to four years for the balance sheets of U.S. households to return to more sustainable levels, although an improved jobs market would help the rebuilding process.
This Friday's employment data scheduled for release in both the U.S. and Canada is expected to set the tone for the financial markets, strategists say.
North American economic growth is likely to be at slower rates than in the past, given the aging of the population and the increased number of retirees, said William Tharp, a senior economist with Dundee Wealth Management Ltd. "[But] I still think the odds are still against a double dip."
