Service Industries Unexpectedly Grew at Slower Pace in June

Photographer: Scott Eells/Bloomberg

Chef de partie Daniel Alvarez makes Cronuts at the Dominique Ansel Bakery in New York. Close

Chef de partie Daniel Alvarez makes Cronuts at the Dominique Ansel Bakery in New York.

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Photographer: Scott Eells/Bloomberg

Chef de partie Daniel Alvarez makes Cronuts at the Dominique Ansel Bakery in New York.

Service industries in the U.S. unexpectedly expanded in June at the slowest pace in more than three years, indicating widespread progress may elude the world’s largest economy even as manufacturing improves.

The Institute for Supply Management’s non-manufacturing index dropped to 52.2 last month, the lowest reading since February 2010, from 53.7 in May, a report from the Tempe, Arizona-based group showed today. The median forecast in a Bloomberg survey called for a rise to 54. A reading greater than 50 indicates expansion in the industries that make up almost 90 percent of the economy.

Service providers placed orders at a slower pace even as they hired more workers, which may indicate demand is strong enough to prompt a pickup in economic growth later this year. The slowdown indicates the effects of the payroll tax increase and government budget cuts that took effect earlier this year may still be lingering.

The service slowdown is probably “the tail of the adjustment to fiscal drag,” Ken Mayland, president of ClearView Economics in Pepper Pike, Ohio, said before the report. “At some point you reach a new equilibrium, and that becomes a springboard for expansion.”

Stocks held earlier losses after the report. The Standard & Poor’s 500 Index fell 0.3 percent to 1,609.68 at 10:44 a.m. in New York, and oil prices rose on concern over mounting political unrest in Egypt.

Survey Results

Estimates of the 74 economists in the Bloomberg survey ranged from 52 to 55.6 for the services index, which includes industries from utilities and retailers to health care, housing and finance. The gauge averaged 53.6 since the expansion began in June 2009 through May.

Other reports today showed companies boosted employment in June, the trade gap unexpectedly surged in May and fewer workers filed claims for unemployment benefits last week as consumer confidence climbed to the highest level in more than five years.

The ISM’s factory index earlier this week showed manufacturing, which accounts for about 12 percent of the economy, expanded more than expected in May, climbing to a three-month high of 50.9 from 49 in May. Employment lagged, falling to 48.7 from 50.1 the prior month.

Orders Cool

The ISM non-manufacturing survey’s measure of new orders decreased to 50.8 in June, the weakest reading since July 2009, from 56 a month earlier. A gauge of business activity dropped to 51.7, the lowest since November 2009, from 56.5.

Employment was a bright spot, with the hiring gauge climbing to 54.7, a four-month high, from 50.1 last month.

Consumer spending rebounded in May after dropping in April for the first time in almost a year, Commerce Department data showed last week. Purchases gained 0.3 percent in May after dropping 0.3 percent the prior month. Household purchases account for about 70 percent of the economy.

The rebound in housing may help explain why consumer confidence and spending are improving, benefiting companies such as Paychex Inc. (PAYX), which provides human resource and payroll outsourcing to small- and medium-sized businesses.

“I think housing is a really important measure for us because we have a lot of jobs around that, a lot of contracting, roofers, et cetera around that,” Martin Mucci, the Rochester, New York-based company’s chief executive officer, said in a June 27 earnings call. Mucci said that housing starts and prices have increased. “All of that is positive and so we’re feeling like we’re coming off the end of the year with some momentum and that will certainly help us.”

Home Prices

The S&P/Case-Shiller index of property values increased 12.05 percent from April 2012 after advancing 10.9 percent in March.

Purchases of previously owned homes also climbed in May, rising to a 5.18 million pace following a 4.97 million annual rate in April, according to the National Association of Realtors. Housing starts picked up to a 914,000 annual rate from 856,000 the prior month, Commerce Department figures showed.

Borrowing costs have climbed from record lows, which potentially could slow the industry’s momentum. The average rate on a 30-year fixed mortgage was 4.46 percent in the week ended June 27, its highest since July 2011, according to data from Freddie Mac. The rate fell to 4.29 percent this week and reached a record low of 3.31 percent in November in figures dating to 1972.

The unemployment rate was 7.6 percent in May and is forecast to drop to 7.5 percent when the Labor Department releases June figures July 5. Payroll data released that day will show that 165,000 jobs were added in June following a 175,000 gain for May, based on the median estimate among economists in a Bloomberg survey.

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

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