Services, the biggest chunk of the U.S. economy, picked up in April as gains in orders and sales signaled even faster growth ahead.

The Institute for Supply Management’s non-manufacturingindex rose to 55.2, the highest level since August, from 53.1 in March, the Tempe, Arizona-based group’s report showed today. Readings above 50 indicate expansion. Bookings jumped by the most in four years.

Retailers, restaurants and construction companies were among the 14 industries reporting growth last month as the world’s biggest economy rebounds from a weak first quarter. Increased hiring sets the stage for stronger consumer spending that will benefit companies such asUnited Parcel Service Inc. (UPS)

“It’s a solid report, consistent with what we saw in the April employment numbers and in manufacturing,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, who projected a reading of 55. “The economy is emerging nicely from the winter doldrums.”

The ISM’s gauge of orders jumped to 58.2 last month from 53.4 in March, the biggest gain since March 2010. Demand, measured by the group’s business activity index, registered the strongest one-month increase in more than six years.

David Fuller's view

Many people remain concerned and frustrated by the USA’s economic performance.  However, I maintain that this gradual, somewhat erratic recovery is consistent with GDP performance following a severe credit crisis recession.

It is just over five years since the US economy began to recover with the help of monetary stimulus from the Federal Reserve.  The process is inevitably slow as both consumers and corporations deleverage and attempt to increase savings where possible.  The deleveraging ensures that tax receipts for government expenditure are considerably lower than when the economy was stronger, as we last saw in 2007.  Unemployment also rises, reducing tax revenues somewhat further and with more people out of work, costs for social services increase.

In other words, the economy stalls and confidence plummets, as we saw during 2008.  The deleveraging is a necessary, cyclical process following a speculative credit bubble.  Fed policies cushioned the recession somewhat and this may have slowed the subsequent recovery as some economic commentators claim.  However, the global shock of a much deeper recession, if the Fed had done nothing, would have been considerably more destructive with tragic consequences for many. 

We probably have at least another two years before US GDP growth approach levels that we would consider normal, not least as global growth is also slow.  Assuming no significant exogenous shocks, quantitative easing in the US will end this year but the Fed’s continued low interest rates and overall accommodative monetary condition should cushion downside risk on Wall Street, despite today’s relatively high valuations. The outlook may remain choppy; including some sharp corrections, but valuations would gradually improve for many shares in a ranging market, due to GDP growth and corporate earnings.  This outlook is similar for many other economies and their stock markets.

Meanwhile, I continue to favour corporate Autonomies - large multinational shares, especially those which have lower price-to-earnings ratios and higher covered yields than their respective indices.