Services index fell to 59.9 last month

Pace of expansion may be cooling

July 07, 2004|By BLOOMBERG NEWS

NEW YORK - A key measure of the U.S. service economy fell more than expected in June, suggesting the pace of the expansion may be cooling, and indexes for prices and employment rose to records.

The Institute for Supply Management's index of financial services, construction, retail and other nonmanufacturing industries dropped to 59.9, the lowest since December, from 65.2 in May. The drop of 5.3 points is the largest since October 2001, in the aftermath of terrorist attacks on New York and Washington.

"We aren't running as fast as in the previous several months, but those were unusually strong and it's only natural to look for this index to cool somewhat," said Michael Moran, chief economist at Daiwa Securities America Inc., who had forecast a reading of 60.

The services report followed figures last week which showed that job gains and auto sales were less than expected in June. The index still has been above 50, showing expansion, for 15 straight months. Moran said he views as "encouraging" the report's separate indicators of higher orders and employment.

U.S. employers announced plans in June to cut 64,343 jobs, a 7.8 percent increase from the year-earlier month, a private survey by placement firm Challenger, Gray & Christmas Inc. said yesterday. While cuts were down 12 percent from May, it's difficult to compare consecutive months because the data is not seasonally adjusted.

Economists expected the Tempe, Ariz., institute's index to fall to 63. It reached a record 68.4 in April and has exceeded 50, indicating expansion, every month since April 2003. Services account for about 85 percent of the economy.

"The recovery is still holding up," Bob Moulton, president of Americana Mortgage Group Inc., said in an interview yesterday. "The interest rate environment, which runs the housing market, has been pretty stable, and job growth has been strong." Americana is hiring loan officers.

The general index number, which economists refer to as the headline number, is a measure of sentiment and is independent of the report's separate measures for prices, orders and other detail on the services economy.

The survey's employment index rose to a record 57.4 from 56.3, and the survey's index of prices paid, a measure of costs for purchased materials and services, rose to a record 74.6 from 74.4 in May. Thirteen of 17 industries reported increases in activity. One, wholesaling, showed contraction. Three had no change.

"This is one of those really odd reports - the headline was terrible but the details were really good," said Joel Naroff, president of Naroff Economic Advisors.

The prices-paid index reached a record in part because of high energy prices. The cost of a barrel of oil reached a record $42.45 on the New York Mercantile Exchange on June 2.

The Labor Department reported Friday that June payrolls rose 112,000, less than forecast, bringing the total jobs added this year to 1.3 million. Service-providing industries added 122,000 workers in June, down from 169,000 in May and 280,000 in April.

The index of new orders for nonmanufacturing companies rose to 62.4 from 61.3. Order backlogs fell to 55.5 from 56.5. The inventory index rose to 57.5 from 54 in May.

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