U.S. Service Industries Expanded at Slower Pace

By Bob Willis

Oct. 3 (Bloomberg) -- Service industries in the U.S. expanded at a slower pace in September as companies cut back on hiring.

The Institute for Supply Management's index of non- manufacturing businesses, which make up almost 90 percent of the economy, decreased to 50.2, higher than forecast, from 50.6 in August, the Tempe, Arizona-based group said today. A reading of 50 is the dividing line between growth and contraction.

A three-year housing slump that triggered the recent credit meltdown is reverberating across the economy, prompting increased job losses and declines in spending. Earlier today, the Labor Department reported the economy last month lost the most jobs in five years.

``With domestic demand weak, as export demand falls, that will soften the economy,'' Anna Piretti, a senior economist at BNP Paribas in New York, said before the report.

Economists forecast the index would decline to 50, the dividing line between growth and contraction, according to the median of 67 projections in a Bloomberg News survey. Estimates ranged from 42 to 51.9.

Another report from the ISM earlier this week showed manufacturing shrank in September at the fastest pace since the last recession in 2001. The ISM's factory index fell to 43.5, for a sixth reading of contraction in the last nine months, from 49.9 in August.

Payrolls Drop

The economy lost 159,000 jobs last month, for a total of 760,000 job cuts so far this year, the Labor Department said earlier today. Service industries subtracted 82,000 workers in September and financial firms cut payrolls by 17,000, Labor said.

The financial industry has been especially battered as the current credit crisis prompted the Bush administration to ask Congress for $700 billion to shore up the banking industry. Barclays Plc, the U.K. bank that bought parts of Lehman Brothers U.S. businesses, may cut as many as 5,000 jobs at the bankrupt company, Wall Street recruiters said last week.

The ISM's employment index dropped to 44.2 from 45.4 in August. The institute's business activity index declined to 52.1 from 51.6, while its new orders gauge rose to 50.8 from 49.7.

The ISM's measure for backorders dropped to 46.5 from 49. The group's measure of prices paid by non-manufacturing businesses fell to 70 from 72.9 a month earlier.

Energy costs in September continued to recede from July's record highs. The average price for a barrel of crude oil last month was $103.76, compared with $116.69 a month earlier.

Slowing growth abroad is also affecting U.S. service companies from banks, to business services and hotel chains.

Marriott International Inc., the biggest U.S. hotel chain, forecast a steeper drop in 2009 earnings than analysts estimated as withering economies around the globe erode travel budgets.

``In 2009, at a minimum, the company expects the business environment to remain unusually challenging,'' the company said this week.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net