The giant US services sector grew for the ninth straight month in December but the pace of expansion slowed, a report showed on Tuesday, confounding economists who expected a greater increase.
A steady reading on employment from the Institute for Supply Management's non-manufacturing survey did little to change optimistic forecasts on Wall Street for a fifth month of US employment gains.
Nor was the slight drop in layoff announcements last month, reported by employment research firm Challenger, Gray & Christmas, likely to prompt economists to tweak their estimates for the government's payrolls report, due on Friday.
ISM's overall non-manufacturing index dropped to 58.6 in December from 60.1 in November, falling far short of Wall Street forecasts of a rise to 61.3. The employment index fell to 54.0 from 54.9 in November, which was its highest since March 2000.
New orders accelerated, with that index rising to 61.2 from 60.1 while the prices index rose to 60.0 in December from 58.0 the previous month.
"It's encouraging that the orders component was up and the employment index was still above 50, indicating expansion in employment," said Gary Thayer, chief economist at A.G. Edwards & Sons, in St. Louis.
Stocks pulled back modestly after the ISM services report while government debt prices, which tend to benefit from negative economic news, climbed higher.
The services industry, which includes businesses ranging from hotels and restaurants to travel agencies and chain stores, accounts for roughly 80 percent of the US economy.
FACTORY ORDERS DOWN: New orders for US factory goods sank in November, staging the largest drop in over half a year, the government said on Tuesday.
Factory orders dropped 1.4 percent in November, the Commerce Department said, after rising 2.4 percent the previous month. The decline was close to Wall Street expectations of a drop of 1.5 percent.
But the drop was largely obscured by a stunning jump in December manufacturing, which ISM reported late last week, and by robust auto sales for the same month.
Vehicle sales for December, released late on Monday, proved far stronger than even the loftiest estimates.
Sales of North American-made vehicles were around a 14.9 million pace in the month, well above forecasts of 14.1 million and the highest in five months.
That in turn pointed to another decent quarter for consumption and encouraged those analysts looking for GDP growth of 4.0 percent or better.
"We were thinking 5.0 percent anyway, but the numbers suggest a risk of even more," said Joe LaVorgna, senior US economist at Deutsche Bank Securities.
That outlook was tempered only slightly by chain store sales figures showing a 0.1 percent drop in the week to January 3. Year-on-year growth was a robust 5.6 percent.
A separate report looking at the entire month of December showed a 1 percent drop from November but a decent 3.4 percent gain from a year earlier.