Bloomberg News

Service Industries in U.S. Expanded at Slower Pace in June

July 06, 2011

(Updates with closing markets in fifth paragraph.)

July 6 (Bloomberg) -- Service industries in the U.S. expanded at a slower pace in June, a sign the economy cooled at the end of the first half of 2011.

The Institute for Supply Management’s index of non- manufacturing businesses decreased to 53.3, less than projected, from 54.6 in May. Economists forecast the gauge would drop to 53.7, according to the median estimate in a Bloomberg News survey. A reading above 50 signals expansion.

Service companies, which account for about 90 percent of the economy, joined manufacturing last quarter in slowing as a 9.1 percent unemployment rate limited consumer spending. Businesses like FedEx Corp. project the expansion will pick up through the rest of the year as gasoline prices provide relief for households and supply disruptions from Japan abate.

“We’re closing the door on a very disappointing first half of the year, which wasn’t a disaster but highlights the fragility and the difficulty of this recovery,” said Julia Coronado, chief economist for North America at BNP Paribas in New York. In coming months, “some of the relief in commodity prices should help businesses maintain margins and therefore become a bit more confident in doing things like investing and hiring,” she said.

Stocks rose, posting their sixth advance in seven days, as gains in transportation and consumer-staple companies overshadowed China’s interest-rate increase. The Standard & Poor’s 500 Index climbed 0.1 percent to 1,339.22 at the 4 p.m. close in New York. Treasuries rose, pushing down the yield on the benchmark 10-year note to 3.11 percent from 3.12 percent late yesterday.

Range of Estimates

Estimates for the index from 71 economists surveyed by Bloomberg ranged from 51.2 to 56. The Tempe, Arizona-based group’s index averaged 56.1 in the five years to December 2007, when the last recession began.

The ISM services survey covers industries ranging from utilities and retailing to health care and finance. The report follows the group’s July 1 figures that showed manufacturing accelerated in June, supporting the Federal Reserve’s forecast for an economic pickup in the second half of 2011.

The non-manufacturing survey’s measure of new orders decreased to 53.6 from 56.8 the prior month, today’s report showed. A gauge of order backlogs dropped to the lowest level this year. A measure of business activity eased to 53.4 from 53.6 in May.

The group’s employment gauge was little changed at 54.1 in June after 54 a month earlier.

The index of prices paid declined to 60.9 from 69.6.

Slower Spending

Consumer spending stagnated in May as employment prospects dimmed and rising inflation caused Americans to cut back, the Commerce Department said June 27. Labor Department figures showed employers added 54,000 workers in May, the smallest number in eight months, and the cost of living excluding food and energy prices rose the most since July 2008.

In June, payrolls probably expanded by 100,000 while the unemployment rate held at 9.1 percent, according to the median forecast in a Bloomberg survey ahead of the Labor Department’s July 8 report.

Fed officials attributed some of the slowdown in the first half of this year to “factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending,” along with factory disruptions from the aftermath of Japan’s March earthquake. The recovery is “continuing at a moderate pace,” the policy makers said in a June 22 statement.

Cheaper Gasoline

Gasoline prices have started to ease. Retail fuel costs dropped 11 percent on July 3 from $3.99 per gallon in May, the highest since July 2008, according to figures from AAA, the nation’s largest auto club.

FedEx, operator of the world’s biggest cargo airline, is among companies projecting business will improve. The Memphis, Tennessee-based carrier forecast full-year earnings that may top analysts’ estimates as demand climbs.

“The near-term softness in the economy will be temporary as fuel prices have retreated from their April highs and the Japanese economy recovers,” Fred Smith, chairman and chief executive officer of FedEx, said on a June 22 conference call. “The industrial sector will lead growth in the U.S. and overseas in the next two years, supporting shipping demand.”

--Editors: Vince Golle, Chris Wellisz

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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