May 5 (Bloomberg) -- U.S. service industries contracted less than forecast in April as home purchases and retail sales rose, another signal that the economic slump is abating.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 43.7 from 40.8 the prior month, according to the Tempe, Arizona-based group. Readings below 50 signal contraction. Separately, a survey of chief executives found the highest level of confidence in three years.

The economy has “moved beyond the worst period of decline,” David Resler, chief economist at Nomura Securities International Inc. in New York, said in an interview with Bloomberg Television. “Businesses are starting to see an improvement in order flows. It’s changing and improving the outlook.”

Other reports have shown sales and construction of single- family homes stabilized this year, consumer spending and confidence rose and the manufacturing slump has eased. Still, one of the biggest risks remains the deterioration in the job market, with a government report later this week projected to show the unemployment rate rose to a 25-year high in April.

The ISM services index was projected to increase to 42.2, according to the median forecast in a Bloomberg News survey of 66 economists. Estimates ranged from 38 to 46.

An index of confidence among U.S. chief executive officers climbed in April to 50, the highest level since early 2006, from 25.9 in January, as more company leaders believed the recession will ease, a Business Council survey showed today.

Bernanke Testimony

The reports came as Federal Reserve Chairman Ben S. Bernanke warned Congress that another shock to the financial system would undercut forecasts the recession will end this year. Stocks retreated for the first time in three days on concern government tests will show some of the firms will need more capital to withstand a further decline in economic growth.

“A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall,” Bernanke said today in testimony to the congressional Joint Economic Committee. He highlighted that the economic contraction may be slowing and that the housing market has “shown some signs of bottoming” after a three-year slump.

Real estate, retail and finance companies were three of the seven service industries that expanded last month, according to the ISM report. Eleven industries continued to contract, led by management, agriculture and construction firms.

Stocks, Treasuries

The Standard & Poor’s 500 index closed down 0.4 percent at 903.80 in New York, as speculation grew that government stress tests will show some banks need more capital. The yield on the benchmark 10-year Treasury note rose to 3.16 percent at 4:14 p.m. in New York from 3.15 percent late yesterday.

The ISM non-manufacturing industries index of employment rose to 37 from 32.3 the prior month, and its gauge of new orders climbed to 47, the highest level since September, from 38.8 in March.

“Employment is still in a pretty good contraction mode,” Anthony Nieves, chairman of ISM’s non-manufacturing survey, said in a conference call with reporters. It is “going to lag other indicators,” he said.

A measure of prices paid increased to 40 from 39.1. The measure of new export orders jumped to 48.5 from 39.

The ISM’s April manufacturing gauge, released last week, showed the slowest pace of contraction in seven months.

Little Credit

Homebuilding, included in the ISM non-manufacturing index, is likely past its biggest declines as sales stabilize. Pending sales of existing homes posted the first back-to-back gain in almost a year in March, figures showed yesterday.

Still, banks aren’t making credit easier to get. The Fed’s quarterly survey of senior loan officers yesterday showed a larger share of banks reported tightening terms on residential mortgages compared with the prior survey, even as more domestic respondents saw increased demand for prime mortgages.

A lack of credit is one reason economists surveyed by Bloomberg last month predict it will take time for gains in consumer spending, the biggest part of the economy, to be sustained.

Purchases climbed 2.2 percent in the first three months of this year, halting their biggest slide since 1980. The economy shrank at a 6.1 percent annual pace after contracting 6.3 percent in the fourth quarter of 2008.

The pace of economic contraction “appears to be somewhat slower,” the Fed said last week after its policy meeting, when it held interest rates close to zero.

Job Losses

Another cause for concern is the faltering labor market. The economy has lost 5.1 million jobs since the recession began in December 2007, the most of any economic slump in the post- World War II era. Payrolls fell by more than 600,000 workers in April for a fifth straight month, according to the Bloomberg survey median.

Filene’s Basement Inc., the century-old clothing chain, yesterday sought bankruptcy protection, the second time in almost a decade, after sales slumped. Las Vegas-based Wynn Resorts Ltd.’s revenue is down as business at casinos slows, Chief Executive Officer Steve Wynn said last week.

“People who have lost their jobs and whose businesses are in trouble don’t have money for leisure and optional expenses,” Wynn said in an April 28 speech in Beverly Hills, California.

Starbucks Corp., the world’s largest coffee-shop operator, is among companies seeing an improvement. The Seattle-based company last week reported sales and customer traffic declined at a slower rate in the second quarter than the first.

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

Last Updated: May 5, 2009 16:15 EDT