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Service Industries in U.S. Sustained Growth in May: Economy

Growth in U.S. Service Industries Was Little Changed in May
A service deli worker for Costco Wholesale Corp., loads chicken into a rotisserie at a store in San Francisco. Photographer: David Paul Morris/Bloomberg

Service industries sustained their pace of growth in May, showing the biggest part of the U.S. economy is withstanding the impact of the European debt crisis.

The Institute for Supply Management’s index of non-manufacturing businesses, which covers about 90 percent of the economy, unexpectedly rose to 53.7 last month from April’s 53.5, the Tempe, Arizona-based group said today. The median forecast of 75 economists surveyed by Bloomberg News projected 53.4. Readings above 50 signal expansion.

A pickup in orders, similar to the group’s manufacturing data last week, and the first decline in prices in almost three years ease concern services will falter as the debt crisis pushes Europe toward a recession. Today’s report also showed employment almost stalled, confirmation of a slump in hiring that signals companies are hesitant to expand.

“Caution is going to remain with us,” said Michael Carey, chief economist for North America at Credit Agricole CIB in New York, who correctly forecast the gain in the services index. “There’s a big question about Europe, big uncertainty about what will happen on the fiscal side in the U.S., and the uncertainty is holding back robust growth.”

Economists’ estimates in the Bloomberg survey ranged from 52 to 55.1. The ISM services survey covers industries ranging from utilities and retailing to housing, health care and finance.

Stocks rose after the figures and a report that said Europe’s bailout fund was preparing a credit line for Spain. The Standard & Poor’s 500 Index climbed 0.6 percent to 1,285.5 at the close in New York. Finance ministers and central bank governors from the world’s leading economies also agreed to coordinate their response to Europe’s financial crisis.

European Data

Elsewhere, euro-area services and manufacturing output contracted in May at the fastest pace in almost three years, adding to signs the economy is suffering under the worsening sovereign-debt crisis.

The Reserve Bank of Australia cut its benchmark interest rate by a quarter percentage point to the lowest since 2009 on concern over Europe and slower Chinese growth.

Today’s U.S. ISM report followed June 1 data that showed factories tempered production and pared inventories in May as the global economy weakened. The ISM 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.

The non-manufacturing survey’s measure of new orders climbed to 55.5 from 53.5 in the prior month, and its business activity gauge rose to 55.6 from 54.6. The index of prices paid decreased to 49.8, the lowest since July 2009, from 53.6.

The employment measure dropped to a five-month low of 50.8 from 54.2.

Uncertain Outlook

“There’s still a little bit of uncertainty,” Anthony Nieves, chairman of the ISM’s non-manufacturing index, said in a conference call with reporters. “Because things are coming in slow and steady, jobs have also been added slow and steady. We continue on a path of growth,” he said, though it is “slight, incremental growth.”

A cooling labor market may help explain why demand is yet to accelerate. Payrolls climbed by 69,000 in May, less than the most-pessimistic forecast in a Bloomberg survey, after a revised 77,000 gain in April that was smaller than initially estimated, figures showed June 1. The jobless rate rose to 8.2 percent from 8.1 percent.

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

Jobs Concern

“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 employment growth.

Falling fuel costs represent a positive influence on consumers. The average cost of a gallon of regular gasoline at the pump dropped to $3.57 on June 4, a three-month low.

That is helping shore up purchases in less expensive items. Retailers’ same-store sales topped analysts’ estimates in May as warm weather combined with the lower gasoline prices to draw shoppers. Sales at Minneapolis-based Target Corp., the second-largest U.S. discount retailer, climbed 4.4 percent. Framingham, Massachusetts-based TJX Cos., the owner of T.J. Maxx and Marshalls, posted an 8 percent increase, reports showed last week.

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