updated 6/5/2006 11:01:06 AM ET 2006-06-05T15:01:06

The service sector of the U.S. economy expanded in May, but at a slower pace than in April, a private survey of supply managers said on Monday.

Major Market Indices

The report offered a possible indication that fuel prices are starting to crimp growth in the service sector, which accounts for two-thirds of the U.S. economy. The survey by the Institute for Supply Management indicated concern about the prices of raw materials and fuels.

The ISM index of non-manufacturing activity was 60.1 in May, down from 63 in April. The latest reading matched analysts’ expectations.

A reading of 50 and above points to growth, while a figure below 50 signals contraction.

Managers in diverse sectors like transportation, banking and retailing reported that energy costs were having an effect.

Increases in general business activity, new orders and backlogs slowed in May compared to April, while increases in prices paid, hiring and foreign trade accelerated.

Last week, the ISM reported that expansion of activity in the manufacturing sector also slowed. Its manufacturing index dipped to a reading of 54.4 in May from 57.3 in April.

Ed Yardeni, chief investment strategist at investment firm Oak Associates Ltd. in Akron, Ohio, called the service-sector number “solid.”

“They can complain about their costs going up, but they’ve been pretty good about offsetting them with higher productivity and still maintaining high profits,” Yardeni said. “So I’m not particularly concerned about that leading to higher inflation or lower profits.”

The core annual rate of inflation at the consumer end is already above the 2 percent favored by the Federal Reserve, which points to further interest-rate increases.

However, a slowdown in economic growth could make the Fed’s rate-setting committee conclude that further hikes in interest rates are unnecessary.

The next meeting of the Federal Reserve Open Markets Committee is June 28-29. Before that, the Labor Department reports on May consumer prices on June 14.

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