Bloomberg News

U.S. Services Industries Probably Expanded at a Slower Pace

July 06, 2011

July 6 (Bloomberg) -- Service industries in the U.S. probably expanded at a slower pace in June, showing the expansion cooled at the end of the first half of 2011, economists said before a report today.

The Institute for Supply Management’s non-manufacturing index fell to 53.7 last month from 54.6 in May, according to the median estimate in a Bloomberg News survey. Readings greater than 50 signal expansion.

Service companies that account for about 90 percent of the economy joined manufacturing last quarter in slowing as a 9.1 percent unemployment rate limited consumer spending. FedEx Corp. is among those businesses projecting the expansion will gain momentum through the rest of the year as gasoline prices provide relief for households and Japan supply disruptions abate.

“We’re seeing a bottoming in activity,” said John Herrmann, senior fixed-income strategist at State Street Global Markets LLC in Boston. “Businesses are poised to do a little bit better in the second half of the year. There should still be some headwinds, but energy prices are coming off and improved manufacturing will favorably spill over to services.”

The Tempe, Arizona-based ISM’s report is due at 10 a.m. New York time. The 70 estimates in the Bloomberg survey ranged from 51.2 to 56.

The ISM services survey covers industries that range from utilities and retailing to health care and finance. The report follows the group’s July 1 figures that showed manufacturing accelerated in June, a sign supporting the Federal Reserve’s forecast that the economy will strengthen in the second half of 2011.

Consumer Spending

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

In June, payrolls expanded by 100,000, while the unemployment rate held at 9.1 percent, the median forecast in a Bloomberg survey showed 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.

The Standard & Poor’s 500 Index rose 5.6 percent last week for its biggest weekly rally since July 2009 on optimism the expansion will strengthen through the end of the year.

Gasoline Prices

Surging gasoline prices have started to wane. 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.”

--With assistance from Chris Middleton in Washington. Editors: Vince Golle, Christopher 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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