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U.S. service sector grew more slowly in June

The service sector grew more slowly in June, an industry trade group said Tuesday, offering the latest sign that the economic recovery is weakening as the second half of the year begins.
/ Source: The Associated Press

The service sector grew more slowly in June, an industry trade group said Tuesday, offering the latest sign that the economic recovery is weakening as the second half of the year begins.

The Institute for Supply Management, a trade group of purchasing executives, said its index tracking service-oriented companies slid to 53.8 last month from 55.4 in May — the highest point since the recovery began.

A reading above 50 indicates expansion. June's reading is well above the 37.2 low in November 2008. But it's far below the pre-recession high of 67.7 in 2004.

The index was broadened in January 2008 to consider four areas of information: business activity, employment, supplier deliveries and new orders. Before that, it only looked at business activity.

A robust service sector, which accounts for about 80 percent of U.S. employment, is crucial to keeping the economy expanding and adding jobs. Service-oriented jobs include those in hospitals, shops, restaurants, airlines, schools, construction, banks and consulting firms, among others.

The dip in the non-manufacturing index follows last week's raft of economic data that points to a slowing recovery. For the second straight month, private-sector job creation was weak. The number of people seeking unemployment benefits is on the rise, a sign that layoffs have yet to ebb. Home sales are plunging and factory orders are down.

Still, the decline in service-sector growth didn't interrupt a rally on Wall Street.

But it may force some economists to revise their expectations for growth in the second half of the year.

"Everyone is kind of pausing, looking at the landscape, not quite throwing in the towel yet," said Pierre Ellis of Decision Economics. The index's slowing growth in June is "the first sign of potential problems." He expects economic growth in the second half to slow to 2.5 percent. The economy grew 2.7 percent during the first quarter.

One troubling sign from the service-sector report is a decline in new orders, which signal future business. While still growing, they fell in June to their lowest level since December.

These businesses mainly depend on shoppers. Consumers have increased purchases only moderately, about 2 to 3 percent in the second quarter, said research firm Capital Economics. High unemployment, a still-rocky housing sector and volatile stock markets are weighing on people's desire to spend.

ISM also says hiring plans dipped in June after growing in May for the first time in 28 months.

The employment index dropped 49.7 last month from 50.4 in May. The sluggish rebound in hiring plans of service companies mirrors the slow pace of private-sector hiring seen in the government's jobs report. Companies added only 83,000 jobs in June, much fewer than the 200,000 new jobs needed each month to bring down the unemployment rate.

The slowdown in growth in June was partly due to weaker demand from abroad because of Europe's economic crisis, said Paul Ashworth, an economist with Toronto Capital Economics. New orders for exports shrank for the first month since February.

Of the 18 industries surveyed, 15 said they were growing. They were led by real estate and arts and entertainment. The finance and insurance sector and "other services," a collection of smaller industries, said they were shrinking; educational services grew at the same pace in June.

Signals from companies are mixed. Many retailers had a better first quarter compared with a year ago, including Christopher & Banks Corp. The women's clothing seller said on June 30 that it got a big boost in net income from stronger sales of full-priced items.