June 4 (Bloomberg) -- Growth in U.S. services industries slowed less than economists forecast in May as a jump in new orders offset a decline in employment.

The Institute for Supply Management's index of non- manufacturing businesses, which make up almost 90 percent of the economy, fell to 51.7 from 52 in April; readings above 50 indicate expansion. The Labor Department said separately that worker productivity in the first quarter accelerated more than previously estimated as companies cut jobs without losing output.

The figures indicate that the economy will keep growing -- albeit at a slower pace -- amid the slide in home values and a surge in energy and credit expenses. The mixed nature of the ISM data is reflected in company reports today: American Express Co. said profit may exceed estimates, while UAL Corp.'s United Airlines will eliminate as many as 1,100 jobs.

``This really confirms that what we're seeing is very sluggish growth, but not contraction,'' Julia Coronado, a senior economist at Barclays Capital in New York, said in a Bloomberg Television interview. ``We're seeing a modest pace of job losses'' that will continue into the second half, she said.

Stocks were mixed and Treasuries slipped. The Dow Jones Industrial Average fell 0.1 percent to close at 12,390.48 while the Nasdaq Composite Index added 0.9 percent to 2,503.14. Benchmark 10-year note yields rose to 3.97 percent at 4:46 p.m. in New York from 3.90 percent late yesterday.

Economists surveyed by Bloomberg forecast the ISM index would fall to 51, according to the median of 73 forecasts.

Jobs Report

A private survey today indicated companies unexpectedly added 40,000 jobs in May, after a gain of 13,000 the prior month. The ADP Employer Services measure, which doesn't include government jobs, has overstated private employment changes by 104,000 on average since November. The Labor Department's May employment report is scheduled for June 6.

Productivity, a measure of efficiency, rose at a 2.6 percent annual rate in the first three months of the year, the Labor Department said today in Washington. Last month, the government estimated a 2.2 percent gain, following at 1.8 percent increase in the fourth quarter.

Federal Reserve Chairman Ben S. Bernanke said in a speech today at Harvard University in Cambridge, Massachusetts, that while rising public expectations for inflation are a ``significant concern,'' there's little sign they are driving workers to demand higher wages, as occurred in the 1970s.

The ISM group's index of new orders for non-manufacturing industries rose to 53.6, the highest this year, from 50.1 the prior month. Its gauge of general activity increased to 53.6 from 50.9.

Less Employment

The group's employment measure dropped to 48.7 from 50.8, signaling companies may be trying to focus on limiting payrolls and boosting productivity to offset the jump in fuel costs. A measure of prices paid jumped to 77, the highest since September 2005.

A report from the supply managers' group earlier this week showed manufacturing contracted in May at a slower pace than projected, indicating sales to overseas buyers may be helping factories weather the slump in domestic demand.

Retail sales fell in April for the second time in three months. The outlook for May hasn't improved. Cars and light trucks sold at a 14.3 million annual pace last month, the fewest since July 1998, according to industry data yesterday.

Wal-Mart Stores Inc., which reports May sales tomorrow, has forecast that monthly sales at stores open at least a year may have gained 2 percent. Shoppers facing record gasoline prices are heading to the world's largest retailer and warehouse clubs such as Costco Wholesale Corp. for discounts on clothing and food.

More Discounts

With consumer spending slowing, retailers have responded by marking down products to attract customers. Williams-Sonoma Inc., the biggest U.S. gourmet-cookware chain, said today that first- quarter profit fell 42 percent after it reduced prices.

While manufacturers and builders are responsible for the bulk of job cuts this year, service providers have slowed the pace of hiring. Employment at service industries grew by 98,000 workers in the first four months, down from a half million added in the same time last year, according to Labor Department figures.

Smaller wage gains and surging fuel and food costs have Americans reeling. Regular unleaded gasoline rose to a record $3.98 a gallon yesterday, according to AAA.

Loss of Confidence

Confidence among U.S. consumers fell in May to the lowest level in 28 years, according to the Reuters/University of Michigan final index of consumer sentiment released last week.

Airlines in particular are suffering. AMR Corp.'s American Airlines, the world's largest carrier, said last month it will cut ``thousands'' of jobs as it slashes U.S. capacity and retires as many as 85 jets to blunt surging fuel prices and slowing demand.

This is a ``very perilous time'' for U.S. carriers, retiring Southwest Airlines Co. Chairman Herb Kelleher said May 21 at the company's annual meeting in Dallas.

``As you have a contraction of service and higher fares, you may see a lot less air service across the U.S.,'' Kelleher said. ``Fuel prices are just beyond belief.''

The economy grew at a 0.9 percent annual rate in the first quarter, capping the weakest six months of growth in five years, the Commerce Department said May 29. Consumer spending rose at a 1 percent rate, the smallest gain since the 2001 recession.

Housing-related companies are also feeling the brunt of the slowdown. Toll Brothers Inc., the largest U.S. luxury-home builder, this week reported its third straight quarterly loss.

``Demand continues to be weak in most markets as our clients worry about selling their existing homes or entering the market before prices stabilize,'' Chief Executive Officer Robert Toll said in a statement.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net.

Last Updated: June 4, 2008 16:51 EDT