July 3 (Bloomberg) -- U.S. service industries unexpectedly contracted in June as a gauge of prices soared to a record and employment reached an all-time low.

The Institute for Supply Management's index of non- manufacturing businesses, which make up almost 90 percent of the economy, decreased to 48.2, the lowest level since January, from 51.7 in May. A reading of 50 is the dividing line between growth and contraction.

Rising energy costs and the prospect of slower consumer demand are making companies less optimistic and pushing them to trim their own spending on technology and payrolls. Earlier today, the government reported that the U.S. lost jobs in June for a sixth straight month.

``The economy clearly seems to be losing some momentum,'' Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina, said in a Bloomberg Television interview. ``Every economic statistic really looks the economy is in recession, or at least in the beginning stages of recession, except GDP.''

Economists surveyed by Bloomberg News had forecast the index would fall to 51, according to the median of 75 projections. Estimates ranged from 48.5 to 53.6.

Earlier today, the Labor Department said payrolls in June fell by 62,000 after a 62,000 drop in May that was greater than initially reported. The jobless rate remained at 5.5 percent after jumping in May by the most in two decades.

Jobs, Prices

The supply management institute's employment measure dropped to 43.8, the lowest reading since records began in July 1997, from 48.7. The institute's gauge for prices paid by non- manufacturers rose to 84.5, the highest on record, from 77 in May.

Raw-material costs may continue to hurt businesses. Crude oil futures rose to a record today of $145.85 a barrel. The average U.S. pump price for regular gasoline reached an all-time high of $4.087 a gallon on July 1, according to AAA, the country's largest motor club.

Rising prices are forcing businesses and consumers to cut back. AMR Corp.'s American Airlines told employees last week it will cut management and support jobs by 8 percent as part of the world's largest carrier's plan to counter rising jet-fuel costs.

The ISM report's measure for backorders for non- manufacturers held at 49 last month. Deliveries decreased to 50.5, from 51 a month earlier, and the inventory measure declined to 60 from 66.5.

Rebates

The government's issuance of about $78.3 billion of tax rebate checks through June 27 may be providing a temporary boost to incomes and spending. U.S. consumer spending rose 0.8 percent in May and incomes grew 1.9 percent, the most in almost three years, the Commerce Department said last week.

Retail sales in the U.S. rose twice as much as forecast in May, helped by spending at electronics and department stores that may have been supported by the rebate checks. Purchases climbed 1 percent, the most since November, the Commerce Department said June 12.

Almost all of the tax rebates will be sent out by the second week of July.

Brunswick Corp., the maker of Sea Ray yachts and Boston Whaler fishing boats, said June 26 it plans to close four more North American plants and may eliminate as much as 10 percent of its workforce. The closings are in addition to the planned shuttering of eight factories that the company announced earlier in the year.

UPS Costs

A report from the supply managers' group earlier this week showed manufacturing unexpectedly expanded in June, helped by strong demand for exports, and that prices paid by factories jumped to a 29-year high.

United Parcel Service Inc., the world's largest package- delivery company, lowered it second-quarter profit forecast June 23 because of rising fuel costs and the slowing U.S. economy.

``The single biggest factor on this was jet fuel,'' Chief Financial Officer Kurt Kuehn said in an interview. ``It's hard to compensate for that until things even out and calibrate a little bit.''

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net

Last Updated: July 3, 2008 10:57 EDT