Business activity in service industries such as financing and insurance soared in March, worrying Wall Street investors that the US economy may be overheating.
The Institute for Supply Management -- which inadvertently released its report about non-manufacturing businesses on Friday along with its data on the industrial sector -- said its index of activity among service companies rose to 63.1 in March from 59.8 the month before. Analysts had been expecting the index to ease to 59.0 in March.
Investors, concerned that the unexpected strength could prompt the Federal Reserve to speed up interest rate increases and boost the cost of borrowing money, sent share prices tumbling.
In afternoon trading, the Dow Jones industrial average fell 100.57, or nearly 1 percent, to 10,403.19. The Nasdaq composite index dropped 13.08, or 0.7 percent, to 1,986.15, while the Standard & Poor's 500 declined 8.54, or 0.7 percent, to 1,172.05.
The data on the service industries contradicted other reports released Friday, which indicated that the economic expansion is moderating.
The institute's index of manufacturing activity indicated that the industrial sector grew in March for the 22nd consecutive month, but at a slightly reduced pace from February. The index registered 55.2 in March, down from February's 55.3 reading. The performance was a bit stronger than the 55.0 analysts had expected.
Although the index was down, that it remained above 50 signaled the industrial sector continued to grow last month, but at a slower rate. A reading of 50 or above in the index means the manufacturing sector is expanding, while a figure below 50 represents a contraction.
The reports from ISM are watched closely by economists and investors because they are among the first readings of the nation's economic performance for any given month.
Also Friday, the Labor Department reported that payroll growth across the country was sluggish in March, with employers adding just 110,000 jobs, the fewest since July. Still, the labor market accommodated enough people to drop the unemployment rate to 5.2 percent.
In a separate report, the Commerce Department said construction spending rose by 0.4 percent in February to a seasonally adjusted annual rate of US$1.05 trillion.
Scott Anderson, senior economist at Wells Fargo & Co., which is headquartered in San Francisco, said "the service sector coming in so strong kind of offset the market's solace in the weaker payroll report."
He said, however, that while the Federal Reserve is likely to continue to boost interest rates, he expects it to maintain its promise of a "measured" pace. The Fed has raised interest rates seven times since last June, all in quarter-point increments.
"Any speculation about a 50 basis point [half a percentage point] increase is off the table because of the payroll report," Anderson said.
The ISM's report on the non-manufacturing sector was scheduled for release next Tuesday but was accidentally released early.
Terri Tracey, spokeswoman for the group, based in Tempe, Arizona, said "the numbers have not had a final proofing," but added that "it's rare there are changes."
She said the 63.1 reading "is firm."
The non-manufacturing index captures activities in businesses such as entertainment, finance and banking, transportation and business services.
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