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Growth in the US services sector in January was the fastest in more than five years, another sign the economy started 2011 on a solid footing, with measures of employment showing more strength. Reports on Thursday, including a sharp fall in weekly claims for jobless benefits, painted a more bullish picture for the world's biggest economy as it recovers from the worst recession since the Great Depression.
US inflation pressures appeared mostly under control even as commodity prices surge - in stark contrast with other parts of the world - helped by US businesses keeping a tight grip on labour costs, the largest expense for most companies. The Institute for Supply Management's index of national non-manufacturing activity rose to 59.4 last month, its highest level since August 2005, from 57.1 in December. Economists had expected a dip to 57.0.
A reading above 50 indicates expansion in the service sector, which accounts for more than 80 percent of US jobs, and it was the 14th straight month of growth. The surprise pick-up in growth, which mirrored a similar acceleration in US manufacturing in January, was further confirmation that the economic recovery was broadening.
Federal Reserve Chairman Ben Bernanke on Thursday acknowledged the improvement in the recovery but said the economy still needed help, citing persistently high unemployment. The US central bank is committed to buying $600 billion of government bonds by June to stimulate the economy further. "Even so, with output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level," Bernanke told the National Press Club in Washington.
A surge in consumer spending lifted the economy to a 3.2 percent annual growth rate in the fourth quarter of 2010, quickening from a 2.6 percent pace in the three prior months. A Labour Department report showed new claims for state jobless benefits fell 42,000 to a seasonally adjusted 415,000, unwinding most of the previous week's weather-induced spike.
The claims data falls outside the survey period for the closely watched payrolls report for January, due on Friday. The economy probably created 145,000 jobs, according to a Reuters poll, after adding 103,000 in December. Reports on Wednesday suggested private hiring was gathering pace.
Expectations for a pickup in job growth were bolstered by a jump in the ISM's employment gauge to its highest since May 2006. The data had little impact on US financial markets. Stock market investors were more worried about increasing chaos in Egypt. US stocks fell and prices for government debt also traded lower. The dollar rose against a basket of currencies. The improving US economic picture was underscored by retailers posting a 4.2 percent rise in sales, handily beating Wall Street expectations for a 2.7 percent gain. Sales grew strongly despite the snowiest January in six years.
A second Labour Department report showed that although businesses faced rising input costs, they kept labour costs down by wringing more from workers, helping keep inflation muted. Nonfarm productivity, a measure of hourly output per worker, rose at an annual rate of 2.6 percent in the fourth quarter after rising at a 2.4 percent pace in the third quarter.
The increase, which was well above economists' expectations for a 2 percent growth rate, bodes well for company profits. Unit labour costs, a gauge of potential inflation pressures closely watched by the Fed, fell at a 0.6 percent rate after dipping 0.1 percent in the third quarter.

Copyright Reuters, 2011

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