U.S. Service Industries Probably Kept Growing

Service Industries Probably Expanded as U.S. Recovery Broadened
A server works at Prospect restaurant in San Francisco. Photographer: Noah Berger/Bloomberg

Service industries in the U.S. probably grew in May at the same pace as the prior month, indicating the economy is failing to gain momentum as employment slows and the European crisis intensifies, economists said before reports this week.

The Institute for Supply Management’s non-manufacturing index, which covers almost 90 percent of the economy, held at 53.5, matching April’s four-month low, according to the median forecast of economists surveyed by Bloomberg News before a report from the Tempe, Arizona-based group on June 5. Separate figures may show the trade gap narrowed in April.

Budget cuts aimed at reducing sovereign debt and putting countries like Greece and Spain on a more sustainable fiscal path are bringing Europe to the brink of a recession that is rippling through the global economy. Investors will also be parsing Federal Reserve Chairman Ben S. Bernanke’s testimony before Congress this week to determine if policy makers are ready to take additional steps to support growth.

“The U.S. economy is somewhat resilient to the situation in Europe, but not immune,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, who projected the ISM index will be little changed. “Business leaders need to add jobs, but are reluctant given the uncertainty. Hiring will remain soft until we get greater resolution out of Europe.”

Concern about the economic outlook is weighing on stocks. The Dow Jones Industrial Average slumped 2.2 percent on June 1, erasing its 2012 advance. The yield on the benchmark 10-year Treasury note dropped to 1.46 percent from 1.56 percent late on May 31, after sliding to a record 1.4387 percent.

Manufacturing Cools

The figures on services follow the ISM group’s report last week that showed factories, the mainstay of the expansion, tempered production in May and pared inventories in response to weakness in the global economy. The manufacturing index fell to 53.5 from a 10-month high in April. At the same time, the orders gauge climbed to 60.1 last month, the highest since April 2011.

Businesses are continuing to invest, a Commerce Department report may indicate tomorrow. Orders to factories climbed 0.2 percent in April after a 1.9 percent drop in March, according to the Bloomberg survey.

Weakness in the labor market may help explain why demand has yet to accelerate. Payrolls climbed by 69,000 in May, less than the most-pessimistic forecast in a Bloomberg News survey, after a revised 77,000 gain in April that was smaller than initially estimated, according to Labor Department figures released June 1. The median projection called for a 150,000 May advance. The jobless rate rose to 8.2 percent from 8.1 percent.

Consumer Spending

Faster hiring and wage growth would ensure sustained growth in consumer purchases, which increased 0.3 percent in April after a 0.2 percent rise the prior month.

“The overall economy is still our customers’ main concern,” Bill Simon, the U.S. chief executive officer of Wal-Mart Stores Inc. said during a May 17 earnings call. “In particular, they remain concerned about job security or the availability of jobs, followed by gas and energy prices and rising food costs.”

Car purchases eased in May, company data showed June 1. General Motors Co. and Toyota Motor Corp. led five of the six largest automakers in reporting U.S. sales gains in May that trailed estimates as incentive offers failed to draw enough buyers amid slumping payrolls growth.

The employment report raised the odds that Fed policy makers will step in to boost growth. Bernanke is due to testify on the state of the economy before Congress on June 7.

Bernanke Testimony

“Bernanke will remind Congress of the things we need to do so the U.S. doesn’t wind up with a situation like Europe,” Price said. “They need to come up with a plan sooner rather than later. The time for a wake-up call is now for everyone, and that includes Congress.”

One fallout from concern about weakness in the global economy is that oil prices have slumped. Crude fell to the lowest level in almost eight months on June 1 as employment reports in the U.S. and the euro area signaled demand for fuel may tumble.

Cheaper oil also helped to trim the trade deficit in April, Commerce Department figures may show on June 8. The gap narrowed to $49.5 billion from $51.8 billion in March, according to the Bloomberg survey median.

Among other reports, revised figures from the Labor Department may show the productivity of American workers fell 0.7 percent in the first quarter, indicating businesses are reaching the limit of how much efficiency they can wring from the workforce. The data is due on June 6.

                        Bloomberg Survey

                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
Factory Orders MOM%       6/4      April     -1.9%      0.2%
ISM Non Manu Index        6/5       May       53.5      53.5
Productivity QOQ%         6/6        1Q      -0.5%     -0.7%
Labor Costs QOQ%          6/6        1Q       2.0%      2.1%
Initial Claims ,000’s     6/7      2-Jun      383       380
Cont. Claims ,000’s       6/7      26-May     3242      3240
Trade Balance $ Blns      6/8      April     -51.8     -49.5
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