U.S. Service Industries Unexpectedly Grew in August

By Timothy R. Homan

Sept. 4 (Bloomberg) -- Service industries in the U.S. unexpectedly expanded in August, spurred by the biggest drop in prices in almost two years.

The Institute for Supply Management's index of non- manufacturing businesses, which make up almost 90 percent of the economy, increased to 50.6 from 49.5 in July, the Tempe, Arizona-based group said today. A reading of 50 is the dividing line between growth and contraction.

Some companies are benefiting from the dollar's past decline that helped export demand and a retreat in oil prices. Still, Federal Reserve officials said yesterday that growth and consumer spending across most of the U.S. was slow last month, preventing most services firms from expanding further.

``Companies are going to have to see a trend of upward movement in business activity and new orders to really feel comfortable with hiring in any kind of sustained fashion,'' Anthony Nieves, chairman of ISM's non-manufacturing survey, told reporters on a conference call. ``It looks like a mixed bag.''

Economists forecast the index would remain unchanged at 49.5, according to the median of 68 projections in a Bloomberg News survey. Estimates ranged from 48.5 to 52.

Inflation Signs

The institute's measure of prices paid by non-manufacturing businesses fell to 72.9, the second straight drop from a record high reached in June, from 80.8 a month earlier, the report showed. New orders climbed to 49.7 from 47.9 in July.

Energy costs in August receded from record highs in July. The average price for a barrel of crude oil last month was $117.02, compared with $133.77 a month earlier, when a barrel reached $147.27 on July 11.

The ISM's measure for backorders dropped to 49, from 52. Supplier deliveries increased to 55.5 from 53.5 a month earlier. The ISM's inventory measure for non-manufacturers declined to 53.5 from 54.5.

The ISM employment measure weakened to 45.4, the fourth straight month of contraction, from 47.1.

The ISM report ``is consistent with very slow growth in the economy,'' said Brian Bethune, chief financial economist at Global Insight Inc. in Lexington, Massachusetts, in an interview with Bloomberg Television. The decline in the employment gauge is ``an indication that services sector employment, particularly in the private sector, is still declining.''

Other reports released today showed the labor market is deteriorating.

Job Market

Companies in the U.S. cut an estimated 33,000 jobs in August, the ADP Employer Services survey showed.

The Labor Department said total unemployment rolls in the U.S. rose to the highest level in almost five years, and last week's initial claims for jobless benefits exceeded forecasts.

The number of Americans filing first-time claims for unemployment benefits increased by 15,000 to 444,000 in the week ended Aug. 30, the Labor Department said. The number of people staying on rolls rose to 3.435 million, the highest since November 2003, in the prior week.

An ISM report earlier on manufacturing showed a contraction in August for the first time in three months as companies slowed production and trimmed payrolls. The report's employment index dropped to 49.7 from 51.9 in July.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net