By Lucia Mutikani
WASHINGTON (Reuters) - U.S. services sector activity accelerated in August amid strong gains in new orders and employment, suggesting that a slowdown in job growth last month was probably temporary.
The economic outlook received a further boost from other data on Wednesday showing only a modest rise in the trade deficit in July. The reports were the latest signs that the economy had gathered momentum early in the third quarter.
Economists, however, cautioned that Hurricane Harvey, which devastated parts of Texas, could sap some of the strength.
"The U.S. economy carried a little more momentum than originally thought," said Jennifer Lee, a senior economist atBMO Capital Markets in Toronto. "However, some of that momentum will be blunted by, for starters, Hurricane Harvey."
The Institute for Supply Management (ISM) said its non-manufacturing activity index increased 1.4 points to 55.3 in August, rebounding from an 11-month low in the prior month. A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of U.S. economic activity.
Last month's increase in services industry activity also reflected a jump of 1.6 points in the production subindex.
Even more encouraging, a measure of services sector employment jumped 2.6 points. The government reported last week that the economy created 156,000 jobs in August, with the private services sector hiring the smallest number of workers in five months.
Economists largely shrugged off the slowdown in job growth, blaming it on a seasonal quirk. Over the past several years, the initial August job count has tended to exhibit a weak bias, with revisions subsequently showing strength.
Last month, services industries also reported an increase in new orders as well as prices. The ISM said the "majority of respondents are optimistic about business conditions going forward."
The dollar was trading marginally lower against a basket of currencies (DXY) as traders digested news that Federal Reserve Vice Chair Stanley Fischer would step down next month.
Prices for longer-dated U.S. Treasuries rose, while stocks on Wall Street were trading mostly higher.
CHINA TRADE GAP WIDENS
Reports on consumer and business spending have suggested the economy gathered more strength early in the third quarter after gross domestic product increased at a 3.0 percent annualised rate in the April-June period.
In a separate report on Wednesday, the Commerce Department said the trade deficit rose 0.3 percent to $43.7 billion in July. When adjusted for inflation, the trade deficit widened to $61.6 billion from $60.8 billion in June.
The so-called real goods deficit in July was below the second-quarter average of $62.4 billion.
While that suggests trade could add to gross domestic product in the third quarter, economists at Wrightson ICAP (LON:NXGN) cautioned that Hurricane Harvey could significantly impact commodity prices and trade volumes, and push up the trade deficit in September.
Trade added two-tenths of a percentage point to GDP in the second quarter.
The politically sensitive U.S.-China trade deficit increased to an 11-month high in July. That ongoing deficit has grabbed the attention of President Donald Trump, who has blamed it for helping to decimate U.S. factory jobs as well as stunting U.S. economic growth.
Trump, who argues that the United States has been disadvantaged in its dealings with trade partners, has ordered the renegotiation of the North American Free Trade Agreement (NAFTA), which was signed in 1994 by the United States, Canada and Mexico.
On Saturday, Trump threatened to withdraw from a free trade deal with South Korea.
"When you negotiate with countries keep in mind you are really going up against some of the biggest corporations in America who moved their operations overseas years ago," said Chris Rupkey, chief economist at MUFG in New York.
"This deficit concern is somewhat misguided as it is largely a trade war with ourselves. These jobs are not coming back to America's heartland."
In July, real goods exports slipped despite petroleum exports hitting a record high. Exports of goods and services fell 0.3 percent to $194.4 billion in July. Exports of motor vehicles and parts fell, but shipments of capital goods rose.
Exports to China increased 3.5 percent, while those to the European Union tumbled 9.8 percent.
Imports of goods and services slipped 0.2 percent to $238.1 billion in July. There were declines in imports of motor vehicles and parts as well as crude oil.
Imports of goods from China increased 3.1 percent. The U.S.-China trade deficit rose 3.0 percent to $33.6 billion in July, the highest level since August 2016.
The United States saw a 3.7 percent drop in goods and services imported from the EU in July, which left the trade deficit with the economic bloc 7.9 percent higher at an eight-month high of $13.5 billion.