May 5 (Bloomberg) -- Service industries in the U.S. unexpectedly grew for the first time since December, helping the economy weather a credit contraction and manufacturing downturn.

The Institute for Supply Management's index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 52 in April from 49.6 the prior month, the Tempe, Arizona-based ISM said. Readings greater than 50 signal growth.

``This is definitely a positive indication that some of the worst outcomes that people are expecting won't be realized,'' said Julia Coronado, senior U.S. economist at Barclays Capital Inc. in New York. ``The economy will weather a period of very weak growth followed by a modest pick-up later in the year.''

The expansion in services such as recreation, real-estate leasing and engineering, helps offset the impact from manufacturing, which has shrunk the past three months, according to the ISM. The figure also may reinforce expectations that the Federal Reserve will refrain from lowering interest rates further after the fastest reductions in two decades this year.

The index was projected to ease to 49.1, the median forecast in a Bloomberg News survey of 68 economists. Estimates ranged from 51 to 47.5.

Treasuries dropped after the release, though they recouped the losses later. Benchmark 10-year note yields were little changed at 3.86 percent at 4:09 p.m. in New York, the same as late in the day on May 2.

`Wait and See'

``We really have to temper this by saying you really have to wait and see,'' Rudy Narvas, senior economist at 4Cast Ltd., said in an interview with Bloomberg Television. ``Otherwise, it looks like a very promising number.''

The services measure contracted in the prior three months. The last time the index was less than 50 for at least 3 consecutive months was in 2001-2002 as the economy was emerging from a recession.

An index of employment rose to 50.8, the highest level so far this year, from 46.9, and a gauge of supplier deliveries increased to 56 from 49.

The ISM group's index of new orders for non-manufacturing industries fell to 50.1 from 50.2 the prior month.

A measure of prices paid rose to 72 from 70.8.

The ISM factory index, reported last week, was unchanged at 48.6 in April as manufacturing shrank for the third consecutive month.

Construction Slump

Builders, which are included in the ISM services index, have been cutting back. Investment in residential construction projects fell at an annual rate of 27 percent in the first quarter, the most since 1981, the Commerce Department reported last week. Declines in homebuilding have subtracted from growth since the first three months of 2006.

The economy grew at a 0.6 percent annual rate in the first quarter, matching the pace in the last three months of 2007. Consumer spending rose at the weakest pace since 2001, hurt by a decline in purchases of long-lasting goods such as cars.

The share of banks making it tougher for companies and consumers to borrow approached a record in the past three months, according to the Fed's quarterly survey of senior loan officers, issued today. A net 70 percent of banks increased loan rates over their cost of funds for commercial and industrial borrowing, the report also showed.

Former Fed Chairman Alan Greenspan said the U.S. has slipped into an ``awfully pale recession'' and may continue to languish for the rest of the year.

`Clearly Receding'

``We are clearly receding,'' with economic growth now at about zero percent, he said in an interview with Bloomberg News last week. Greenspan, who now consults for clients including Deutsche Bank AG, also said it was too soon to declare the end to the credit crisis stemming from the collapse in the subprime mortgage market.

Lower home values, credit restrictions and higher fuel prices continue to depress demand at builders and manufacturers, prompting those businesses to pare expenses.

Payroll figures last week showed the economy lost 20,000 jobs in April, while the unemployment rate dropped. Service providers added 90,000 workers, while builders trimmed staff by 61,000, the most since February 2007.

YRC Worldwide Inc., the biggest U.S. trucking company by sales, reported a first-quarter loss on costs to shut terminals and cut jobs as freight demand weakened. The steps will help YRC return to profitability in the second quarter even as demand remains weak, Chief Executive Officer Bill Zollars said.

``We're not planning on seeing any improvement in the economy for the rest of 2008,'' Zollars said in an April 25 interview. ``Most people have given up on the second-half- recovery theory.''

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

Last Updated: May 5, 2008 16:12 EDT