As Americans spend more on services, will jobs follow?

The U.S. economy expanded at a tepid pace overall last quarter, but some analysts are finding a ray of light in Americans? spending on services.

Services-sector expenditures by consumers rose at a 2.5% real annualized rate in the three months through September, the fastest growth since the 3.1% gain in the fourth quarter of 2006, the government said in Friday?s initial estimate of third-quarter gross domestic product.

The U.S. economy is primarily a service economy, meaning that services account for a far larger share of GDP than the goods-producing sector. So most U.S. jobs naturally are in services, including health care, utilities, finance and recreation. If spending is accelerating in those sectors it could bode well for employment gains ?- the missing (or at least badly lagging) element in the recovery so far.

Strength in spending on services ?has been lacking throughout the recovery,? said Tony Crescenzi, a portfolio manager at bond fund giant Pimco in Newport Beach. The third-quarter GDP data ?suggest this condition might be changing, and if it lasts it would likely contribute to additional payroll growth,? he said.

For the employment picture, ?a rise in [services] spending is very good news,? echoed Robert Brusca, head of Fact and Opinion Economics.

In the first quarter of this year, even as GDP overall grew at a 3.7% rate consumers? services outlays rose a barely positive 0.1%. Services spending grew 1.6% in the second quarter, but that still was slower than the 1.7% growth rate of the economy as a whole.

Last quarter, by contrast, the 2.5% rise in services spending outpaced the 2.0% growth rate of the economy overall.

Of course, just because demand is up doesn?t necessarily mean that service companies will hire. And even if more of them do hire, the quality of the jobs created in the services sector has long been an issue in the domestic economy?s evolution: If we?re just adding more low-paying service positions (e.g., burger-flipping), while higher-paying manufacturing jobs continue to move abroad, that?s not a formula for sustaining a prosperous American middle class.

But at this point, any decent news on jobs might offer some hope to millions of unemployed Americans.

Another measure of the services sector?s health, the Institute for Supply Management?s monthly index of activity in that sector, will be reported on Wednesday. Economists surveyed by Bloomberg News expect only a small increase in the index for October, to 53.5 from 53.2 in September.

But the ISM manufacturing index for October, reported Monday, was stronger than expected, which might indicate that analysts have been too pessimistic about the economy?s strength as the fourth quarter began. The manufacturing index came in at 56.9, well above economists? estimate of 54.0.
Any reading above 50 in the ISM indexes indicates growth.

On Friday the government will report on October employment. Economists surveyed by Bloomberg estimate that the economy added a net 60,000 jobs last month. That would be the first increase since May, but it would still be woefully short of what?s needed to begin making a significant dent in the 9.6% unemployment rate.

-- Tom Petruno

Photo: A line of people at a job fair in Los Angeles last month. Credit: Lucy Nicholson / Reuters