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Service Industries in U.S. Grew Less Than Forecast in June

Service industries in the U.S. expanded in June at the slowest pace since January 2010, a sign the biggest part of the economy is struggling to gain momentum.

The Institute for Supply Management’s non-manufacturing index dropped to 52.1, less than projected, from 53.7 in May, the Tempe, Arizona-based group said today. The median forecast of 70 economists surveyed by Bloomberg News called for 53. Readings above 50 signal expansion.

Companies from Family Dollar Stores Inc. to FedEx Corp. are seeing waning demand, underscoring concern about Europe’s debt crisis, cooling global markets and an absence of U.S. fiscal policy clarity that’s also hurting manufacturing. Limited hiring and income growth indicate households will be reluctant to step up purchases, which account for about 70 percent of the economy.

“Business activity in the services, construction and government sectors of the economy decelerated in June but is still growing at a modest pace,” Steven Wood, principal economist at Insight Economics LLC in Danville, California, said in an e-mail to clients. “A cyclical economic expansion is currently in place but it has softened in the past three months.”

Economists’ estimates in the Bloomberg survey ranged from 51.5 to 54.2. Before the latest numbers, the index averaged 53.4 since the recession ended in June 2009.

Stocks fell, snapping a three-day advance for the Standard & Poor’s 500 Index, as optimism with jobless claims data fizzled on concern over the outlook for global growth. The S&P 500 dropped 0.3 percent to 1,369.34 at 12:26 p.m. in New York.

Jobless Claims

Fewer Americans than forecast filed first-time claims for unemployment insurance payments last week, Labor Department figures showed. Applications for jobless benefits decreased 14,000 in the week ended June 30 to 374,000, the fewest since the middle of May.

Companies added more workers than forecast in June, according to a report from Roseland, New Jersey-based ADP Employer Services. The 176,000 gain last month followed a 136,000 rise the prior month that was higher than initially estimated.

The ISM non-manufacturing survey’s measure of business activity dropped to 51.7, the lowest since November 2009, from 55.6. The gauge of new orders decreased to an eight-month low of 53.3 from 55.5. An index of prices paid decreased to 48.9, the weakest since July 2009, from 49.8.

The employment gauge climbed to 52.3 from 50.8 in the prior month.

The ISM services survey covers industries ranging from utilities and retailing to health care and finance.

Manufacturing Slows

The report follows July 2 data that showed a slowdown in overseas markets including China is limiting American exports and damping prospects for manufacturers. The ISM factory index fell to 49.7 in June, the first contraction in almost three years and worse than the most-pessimistic forecast in a Bloomberg survey.

Sales are also softening in part because of the lack of progress in the labor market. The payrolls tally in June probably crowned the weakest quarter for employment in more than two years, economists in the Bloomberg survey forecast ahead of a Labor Department report due tomorrow. The jobless rate, which has exceeded 8 percent for 40 consecutive months, may have held at 8.2 percent in June.

Family Dollar, the owner of more than 7,200 discount shops in the U.S., narrowed its profit forecast for fiscal 2012 after third-quarter sales trailed analysts’ average estimate.

‘Economic Headwinds’

“It is clear that consumers continue to face difficult economic headwinds,” Chief Executive Officer Howard Levine said on a June 28 conference call with analysts. Discretionary purchases like home goods and apparel continue to be “challenged,” he said.

Demand remains soft, according to FedEx, which is considered an economic bellwether because it carries everything from mobile devices to pharmaceuticals. The Memphis, Tennessee-based company, operator of the world’s largest cargo airline, pledged “significant cost reductions” as slowing economic growth pressures profits.

“We now realize we’ve got to adjust the networks that we built for higher gross domestic product growth than we’re actually seeing,” Chief Financial Officer Alan Graf said on an earnings call last month.

To combat flagging growth, Federal Reserve policy makers said they are ready to take more steps should the U.S. expansion slacken. Fed officials said in a policy statement on June 20 that they expect “economic growth to remain moderate over coming quarters and then to pick up very gradually.”

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