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Service-sector growth slowed in July

The U.S. service sector expanded in July more slowly than in June, a trade group said Friday, the latest in a series of reports suggesting economic growth is moderating.
/ Source: The Associated Press

The U.S. service sector expanded in July more slowly than in June, a trade group said Friday, the latest in a series of reports suggesting economic growth is moderating.

The Tempe, Ariz.-based Institute for Supply Management said its index measuring change in the non-manufacturing sector, which accounts for 80 percent of U.S. economic activity, registered 55.8 in July.

That’s the lowest level since March and down from 60.7 in June, according to ISM, an organization of corporate purchasing executives.

July’s decline is consistent with economists’ expectations that the economy will slow in the second half of this year from last quarter’s 3.4 percent annual growth rate.

Wall Street economists had expected a reading of 59, according to Thomson Financial/IFR. Readings above 50 indicate economic expansion and below 50 indicate contraction.

The July number reinforced other reports suggesting a sluggish economy, such as Friday’s smaller-than-expected growth in payroll additions last month and disappointing July auto sales reported Wednesday.

“There is a certain downward momentum to all these numbers,” said Brian Fabbri, an economist at the investment bank BNP Paribas.

The Dow Jones industrial average fell 70.23 points to 13,393.10 in reaction, after earlier plunging on the government’s latest monthly employment report.

The ISM’s new orders index, a key forward-looking component, fell to a four-year low of 52.8, down from June’s reading of 56.9, while its employment index dropped to 51.7, below June’s reading of 55.

Such figures, along with a steep fall in new export orders to 52.5 from 59 in June, “suggest there will be more weakening in the coming months,” Fabbri said.

The inventory sentiment index, meanwhile, jumped to 65 from 60.5 in June, indicating that the purchasing executives believe existing stockpiles are too high. That could also signal future weakness, Fabbri said, as companies clear out inventory rather than order new goods.

The one bright spot in the report was a decline in the prices-paid index, said Brian Bethune, U.S. economist at Global Insight, a consulting firm. The prices-paid index in July fell to 61.3 from 65.5, suggesting inflation isn’t worsening, which could impact the view of Federal Reserve policymakers who meet next week to discuss the state of the economy, he said.

It follows a similar reduction in prices paid last month by manufacturers, according to a report out Wednesday. The ISM manufacturing survey’s index prices-paid index fell to 65 from 68.

The price reductions stem from a decline in gas and diesel fuel prices, Bethune said, as well as reduced prices for building materials.

In macro terms, the reports indicate the housing slump is “beginning to have repercussions throughout the economy,” Fabbri said, in sectors ranging from bank lending to furniture, appliances and construction materials.

The nation’s biggest mortgage lender, Countrywide Financial Corp., said last week that its second-quarter profit shrank by nearly a third, blaming falling home prices and rising delinquencies among even creditworthy borrowers.

Economists also said the housing slowdown and reduced consumer spending has impacted service sectors such as shipping.

UPS Inc. reported a modest rise in its second-quarter earnings last week, largely due to overseas shipping, as small-package deliveries in the U.S. declined.

Still, economists emphasized that the index’s overall 55.8 reading, while lower than expected, reflects moderate, sustainable economic growth.

Nine of the 15 industries tracked by the index reported growth in July, including retail trade, transportation and warehousing, and finance and insurance. The six industries reporting decreased activity include agriculture, real estate and professional services.

A reading above 60, as happened in June, is “inconsistent with the Goldilocks economy the Fed is looking for,” Bethune said.