Bloomberg News

Service Industries in U.S. Grew at Slower Pace in September

October 05, 2011

(Updates with closing markets in sixth paragraph.)

Oct. 5 (Bloomberg) -- U.S. service industries expanded in September at a slower pace than a month earlier, a sign the recovery is struggling to gain speed.

The Institute for Supply Management’s non-manufacturing index fell to 53 from 53.3 in August. The median forecast of 75 economists surveyed by Bloomberg News was for a drop to 52.8. A reading of 50 is the dividing line between expansion and contraction in services, which cover about 90 percent of the economy. Orders picked up, the report showed.

The lack of job and income growth, deepening pessimism about the economic outlook in the wake of Europe’s debt crisis, and a slumping stock market may hamper consumers’ willingness to increase their spending. The services reading underscores Federal Reserve Chairman Ben S. Bernanke’s comments yesterday that the recovery will be “somewhat slower” in coming quarters.

“The economy has slowed but we’re not in recession territory,” said Michelle Meyer, a senior economist at Bank of America Corp. in New York. “New orders were strong, which shows demand will hold up over the next few months.”

Economists’ estimates in the Bloomberg survey ranged from 51.3 to 55. The Tempe, Arizona-based group’s index averaged 56.1 in the five years to December 2007, when the last recession began.

Stocks rallied, sending the Standard & Poor’s 500 Index to its biggest two-day gain in more than a month, as investors speculated European officials will contain the region’s debt crisis. The S&P 500 climbed 1.8 percent to 1,144.04 at the 4 p.m. close in New York. Treasury securities dropped, sending the yield on the benchmark 10-year note up to 1.88 percent from 1.82 percent late yesterday.

ADP Employment

Private employment expanded last month, another report today showed. ADP Employer Services said companies added 91,000 workers after an 89,000 gain in August. The median forecast in a Bloomberg survey called for an addition of 75,000.

The ISM survey showed a bleaker outlook for the labor market. The group’s employment gauge declined to 48.7 in September, the first contraction since August 2010, from 51.6 in the prior month, today’s report showed.

The measure of new orders increased to a four-month high of 56.5 in September from 52.8. A measure of business activity rose to 57.1 from 55.6. The index of prices paid decreased to 61.9 from 64.2.

The ISM services survey covers industries ranging from utilities and retailing to health care and finance. Today’s report follows the group’s Oct. 1 figures that showed manufacturing expanded in September at a faster pace.

Lack of Optimism

The reading is an “indication of a slow-growing economy,” Anthony Nieves, chairman of the ISM’s services committee, said on a conference call with reporters today. “There’s still this lack of confidence,” and “companies are just a bit hesitant” to invest and hire, he said.

A jobless rate of at least 9 percent for five straight months, slower employment, and declining home and equity values are combining to depress Americans. The Bloomberg Consumer Comfort Index fell in the week ended Sept. 25 to the second- lowest level on record. The gauge dropped to minus 53 and has been stuck below minus 40, the level associated with recessions, since the end of February.

“We expect modest growth to continue,” Alan Graf, chief financial officer at FedEx Corp., said on a Sept. 22 conference call with analysts. “The biggest drag on economic improvement at this time is sentiment, and the country, as well as FedEx, needs a change in that in order to benefit from further economic growth.”

Economic Growth

The economy expanded at a 1.3 percent annual pace in the second quarter after a 0.4 percent rate in the January to March period, resulting in the weakest six months of the recovery that began in June 2009, according to Commerce Department figures. Analysts surveyed by Bloomberg last month projected a 1.8 percent rate of growth for the third quarter, based on the median estimate.

Bernanke, during congressional testimony yesterday, said Fed policy makers stand ready to take further steps to spur the “sluggish” economy if needed.

“The recovery from the crisis has been much less robust than we had hoped,” he said. Fed officials expect a “somewhat slower pace of economic growth over coming quarters” than they did in June, he said, without giving a specific forecast.

--With assistance from Chris Middleton in Washington. Editor: Vince Golle

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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


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