Services Industry Expands Faster Than Expected

The nation's service sector -- a wide range of businesses such as banking, restaurants and insurance -- expanded at a faster pace in February than Wall Street economists had expected, a private research group said Friday.

The growth in these service industries is yet another sign the U.S. economy is on a firm footing, clears the way for a Federal Reserve interest rate increase later this month and allows the central bank to hike rates in May if it needs to do so.

The Institute for Supply Management said its non-manufacturing index rose to 60.1 in February from 56.8 in January. Wall Street economists had forecast a reading of 59. The ISM index is based on a survey of business executives.

A reading above 50 indicates the sector is expanding; below 50 indicates activity is contracting.

The ISM's report suggests "economic activity in the first quarter is pretty robust," said Carl Riccadonna, economist at Deutsche Bank Securities Inc.

Businesses reporting growth in February included mining, insurance, business services and construction companies.

The ISM said its new-orders index rose to 56.2 from 56.0 percent and its employment index rose to 58.2 from 51.1. Its prices index, meanwhile, fell to 64.8 from 67.2.

The ISM found that respondents to its survey "are mostly positive concerning current business conditions," Ralph Kauffman, who oversees the services report said in a statement. "Price increases are still a topic of concern for a number of members."

While the price index declined in February, Kauffman said it "remains in a historically high range for the ISM non-manufacturing business survey."

Among those who saw a busy February was Damian Testa, head of New Jersey business operations for HUB International, an insurance brokerage based in New York. "The economy seems to be going pretty good so we seem to be going pretty good. We (the insurance industry) are a direct reflection of the country's economy," he said.

Testa's brokerage saw gains in commercial real estate, manufacturing and general service businesses like restaurants. "All seem to be, year over year, up a little bit," he said.

Hakan Swahn, owner and president of Townhouse Restaurant Group of New York, voiced concern about a rise in costs.

Swahn, who has been in the restaurant business 18 years, faces higher food prices and spends more to light and heat his restaurants.

"Fish has had an impact on us. I feel that has gone up pretty substantially," said Swahn, adding "I feel more uneasy about the price of seafood than anything else."

Prices of salmon, cod and skate -- for example -- have risen. These higher food prices may force Swahn to change offerings on his menu, or, eventually, he may have to increase prices on his menus. "You can adjust the menu program and then you can adjust pricing."