Euro, U.S. business gains, price pressure builds

By Leah Schnurr and Andy Bruce

NEW YORK/LONDON (Reuters) - Growth in the service sectors in the United States and Europe hit its highest in five years in February, suggesting economic growth is accelerating though inflationary pressures are building.

The latest batch of purchasing managers' indexes (PMI) released on Thursday showed euro zone firms passing on costs to customers at a faster rate last month while prices paid by companies in the services sector rose to the highest since September 2008.

Soaring oil and other commodity costs have pushed prices up across industrialized nations. The European Central Bank may raise interest rates next month, far earlier than markets expected, though any rise would not signal the start of a series of increases, ECB President Jean-Claude Trichet said on Thursday.

There were also positive signs on the employment front with the data showing growth in service sector jobs.

The Institute for Supply Management said its index of national non-manufacturing activity rose to 59.7 from 59.4 in January, the highest level since August 2005. The report's employment gauge rose to 55.6 from 54.5 and was at its highest level since April 2006.

In other reports, top retailers posted stronger-than-expected sales gains last month. Consumer spending is key to the recovery and normally accounts for about 70 percent of economic activity.

The euro zone economy grew 0.3 percent in the fourth quarter, according to official figures released on Thursday. PMI compiler Markit said the data suggest much faster growth in the current quarter of around 0.8 percent.

Overall, the Markit Eurozone Composite PMI rose to 58.2 in February from 57.0 the previous month, its highest level since July 2006 and its 19th month above the 50 mark that divides growth from contraction.

The PMIs showed strong growth in individual euro zone countries, with the Irish services PMI hitting a seven-month high and Spanish service sector firms showing their first expansion in six months.

In Asia, where the service sector takes a much smaller piece of the economic pie, Indian firms showed strong growth and there were signs of mounting inflation pressure as the services PMI hit its highest in seven months.

Growth declined, however, among Chinese and British services businesses last month.


Apart from China, the PMIs showed employment growth continuing in service sector companies across the world, albeit at still fairly modest levels in Europe.

In the 17-nation euro zone, job hiring across the private sector hit a post-recession high as the composite PMI jobs index showed employment expanding for the 10th month in a row.

In the United States, the rise in the employment gauge for the service sector to its highest since April 2006 supported other data showing an improving labor market outlook.

Economists said the figures, which mirrored a series of strong employment numbers through the week, support expectations of strong U.S. jobs growth in February. The government will release its closely-watched nonfarm payrolls report on Friday.

"Going forward, we continue to expect the greatest employment growth will be concentrated in the service sector," Wells Fargo wrote in a note.

But in Britain, where inflation is running at double the Bank of England's 2 percent target, the employment component of the PMI survey dropped again.

"(This) supports our view that the labor market simply isn't strong enough to push through sharply higher wages that would risk second round price effects and therefore prolonged above-target inflation in the medium term," said James Knightley, economist at ING.

Employment in the Chinese services sector -- which comprises only around a quarter of the manufacturing-based private economy -- also fell in February as the PMIs there showed a slowdown in new business growth.

The February HSBC PMI for Chinese services dipped slightly to 51.9 from 52.0 in January, although it showed growth overall and its business optimism hitting a six-month high.

(Additional reporting by Karen Brettell; Editing by James Dalgleish)