Service Industries in U.S. Probably Contracted for Second Month

By Courtney Schlisserman

Aug. 5 (Bloomberg) -- Service industries in the U.S. probably shrank in July for a second straight month, signaling the slowdown in growth broadened, economists said before a report this week.

The Institute for Supply Management's index of non- manufacturing businesses, which make up almost 90 percent of the economy, increased in July to 48.7 from 48.2 a month earlier, according to the median of 72 forecasts in a Bloomberg News survey of economists. A reading of 50 is the dividing line between growth and contraction.

Soaring raw-material costs and slowing sales are prompting companies to trim payrolls and limit spending on new equipment, raising the risk the economic slowdown will worsen. Concern over both growth and inflation will likely induce Federal Reserve policy makers meeting today to keep interest rates unchanged.

``We have weak economic growth,'' said Sam Bullard, an economist at Wachovia Corp. in Charlotte, North Carolina. ``Housing-market and financial-market activity are still pulling down growth.''

The Tempe, Arizona-based institute's report is scheduled to be released at 10 a.m. New York time. Estimates in the Bloomberg News survey ranged from 47 to 52.5.

The Fed's decision is expected to be released around 2:15 p.m. in Washington. Investors anticipate the central bank will hold the overnight lending rate between banks at 2 percent, according futures trading.

Manufacturing Stagnates

A report from the purchasing managers group last week showed manufacturing stagnated in July as orders slumped to the lowest level in almost seven years. A measure of prices paid, reflecting the cost of raw materials, held near a 30-year high.

Job losses have spread beyond manufacturers and builders. Service industries cut 5,000 workers from their payrolls in July, the first decline since March, the Labor Department said Aug. 1. Employers eliminated 51,000 jobs in total, the seventh straight monthly loss, and the unemployment rate rose to a three-year high of 5.7 percent.

IndyMac Bancorp Inc. last month became the second-biggest federally insured financial company to be seized by U.S. regulators after a run by depositors left the California mortgage lender short on cash. The company last week filed to liquidate its remaining assets.

Law firm Cadwalader, Wickersham & Taft said July 30 it will fire 96 lawyers in the U.S. and London because of a ``significant slowdown'' in real-estate finance and securitization work. The latest round of cuts will leave the firm with 580 attorneys.

Spending Risks

Weakness in the labor market, smaller wage gains and surging fuel and food costs are making Americans less confident, indicating consumer spending may keep slowing.

Starbucks Corp., the world's largest chain of coffee shops, said July 30 it had its first quarterly loss in 16 years as a public company and that it will shutter more U.S. stores than it opens in 2009. The company said the day before it was cutting 1,000 jobs beyond the 12,000 it had previously announced and would close three-quarters of its 84 stores in Australia within five days.

``Until the economy significantly improves, we're just trying to do what we can to get through this storm and be much stronger,'' Starbucks Chief Executive Officer Howard Schultz said on a conference call with analysts and investors after the earnings report.

Bloomberg Survey

====================================
ISM Non-
Manu
Index
====================================

Date of Release 08/05
Observation Period July
------------------------------------
Median 48.7
Average 48.7
High Forecast 52.5
Low Forecast 47.0
Number of Participants 72
Previous 48.2
------------------------------------
4CAST Ltd. 49.2
Action Economics 49.5
AIG Investments 49.5
Argus Research Corp. 50.5
Banc of America Securitie 49.3
Bank of Tokyo- Mitsubishi 49.4
Bantleon Bank AG 49.0
Barclays Capital 48.5
BBVA 48.0
BMO Capital Markets 48.0
BNP Paribas 47.5
Briefing.com 51.0
CFC Group 47.9
CIBC World Markets 49.0
Citi 50.0
ClearView Economics 48.7
Commerzbank AG 47.8
Credit Suisse 49.5
Daiwa Securities America 50.0
Danske Bank 49.0
DekaBank 49.0
Deutsche Bank Securities 48.0
Dresdner Kleinwort 48.5
DZ Bank 49.0
First Trust Advisors 47.9
Fortis 48.5
FTN Financial 48.0
GCI Capital 47.0
Global Insight Inc. 48.7
Goldman, Sachs & Co. 49.0
H&R Block Financial Advis 49.5
Helaba 48.0
High Frequency Economics 50.0
HSBC Markets 48.0
IDEAglobal 47.0
Informa Global Markets 49.0
ING Financial Markets 47.9
Insight Economics 51.0
Intesa-SanPaulo 48.5
J.P. Morgan Chase 49.0
Janney Montgomery Scott L 50.6
JPMorgan Private Client 48.0
Landesbank Berlin 47.5
Landesbank BW 48.0
Lehman Brothers 48.8
Lloyds TSB 49.5
Maria Fiorini Ramirez Inc 49.0
Merrill Lynch 48.0
MFC Global Investment Man 49.0
Moody's Economy.com 49.0
National Bank Financial 47.0
National City Corporation 52.5
Natixis 47.0
Newedge 48.5
Nomura Securities Intl. 50.4
Nord/LB 49.5
PNC Bank 48.0
Ried, Thunberg & Co. 49.5
Schneider Trading Associa 49.0
Scotia Capital 48.0
Societe Generale 50.0
Stone & McCarthy Research 47.8
TD Securities 48.0
Thomson Financial/IFR 50.1
UBS Securities LLC 47.5
Unicredit MIB 47.5
University of Maryland 48.0
Wachovia Corp. 47.5
Wells Fargo & Co. 49.5
WestLB AG 48.0
Westpac Banking Co. 47.5
Wrightson Associates 48.5
====================================

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net.