updated 9/3/2009 11:16:51 AM ET 2009-09-03T15:16:51

The U.S. economy’s service sector inched closer to growth in August, but still shrank for the 11th straight month in the face of weak consumer spending.

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The Institute for Supply Management said Thursday that its service index, which covers hospitals, retailers, financial services companies and more, came in at 48.4, up from 46.4 in July.

It was the best reading in 11 months and beat the estimates of a 48 from economists polled by Thomson Reuters. Still, any reading below 50 indicates the service sector is shrinking.

“People are still wary, and they’re holding on to their dollars,” said Anthony Nieves, chair of the service survey committee.

The ISM report, which tracks more than 80 percent of the country’s economic activity, likely will show expansion in late fall, but it is “going to be slow, slow growth once we do turn the corner,” he said.

The survey of purchasing executives in 18 industries showed that business activity grew last month for the first time since last September, while measures tracking new orders and employment also improved from July.

Still, only six sectors reported growth as consumer spending, the key to a strong recovery because it accounts for 70 percent of economic activity, remained subdued.

The ISM reported Tuesday that the manufacturing sector grew in August for first time in 19 months, but Capital Economics’ Paul Dales said the government’s stimulus measures, such as the Cash for Clunkers program, don’t affect the service sector as much. The exports that are propelling U.S. manufacturers also don’t boost the more domestic-oriented service providers, he wrote in a research note.

For example, American retailers posted sales declines last month as shoppers, still worried by unemployment at its highest level in a generation, focused on necessities. Discounters did better than upscale chains, but the back-to-school results Thursday raised further concern about the upcoming holiday season.

Discounter Target Corp. and warehouse club operators Costco Wholesale Corp. and BJ’s Wholesale Club Inc. said sales at established stores dropped, but beat analyst expectations. A 5 percent jump at TJX Cos., which operates discount chains TJMaxx and Marshall’s, topped expectations. But upscale retailers, including Saks Inc. and Nordstrom Inc., struggled.

Real estate, health care and social assistance, and transportation and warehousing were the biggest gainers in the ISM survey. The 12 other industries contracted, led by companies that offer management and support services to other businesses.

The prices companies paid also jumped nearly 22 percentage points, a record month-over-month increase. That’s being driven by more expensive petroleum-based products.

“The level of the overall index remains consistent with basically stagnant conditions,” said MFR Research chief U.S. economist Josh Shapiro.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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