Service sector growth moderates

The service sector grew at a slightly lower rate in May, as prices surged and employment fell.

Quick Vote

What's your key economic issue this election year?

• Gas prices
• Health care
• Jobs
• Housing

or View results

NEW YORK (CNNMoney.com) -- A key survey of service sector executives released Wednesday showed business activity rose at a somewhat slower rate in May, even as employers cut payrolls and prices continued to rise.

The Institute for Supply Management's (ISM) non-manufacturing index fell to a reading of 51.7 from 52 in April. Economists were expecting a reading of 51, according to a consensus compiled by Briefing.com.

A reading above 50 indicates growth in the sector, and a reading below 50 represents a sector-wide decline.

"This report is consistent with the slow growth we're seeing in 2008," said Wachovia economist Sam Bullard.

May marks the first time the index declined - albeit very slightly - since its January facelift. Prior to January's report, the non-manufacturing index was only based on business activity, but it now equally measures business, orders, employment and supplier deliveries. The reading for business activity in the service sector rose to 53.6 in May from 50.9 in April.

The service sector encompasses the retail, transportation and health care sectors. It also includes sectors that have been hit hard by problems in the economy, including finance, real estate and construction.

The report also set off more alarms about the nation's labor markets, since it has been the service sector that has provided most of the job growth in recent years as factories closed or cut employment.

After some labor growth in April, the service sector employment index fell 2.1 points to 48.7 in May. The ISM employment index has now shown contraction in four of the past five months.

The report showed only 18% of service sector employers were adding staff, down from the 22% doing so in April. But just 14% of service-sector employers had cut staff in May, which is fewer than the 17% of employers that trimmed their payrolls in April.

"Everyone will be focused on the employment index number, but we're not seeing the kind of declines we'd see if we were in a recession," said Bullard. "Employers are still hesitant to lay people off, since productivity is up."

According to a Labor Department report released Wednesday, worker productivity increased at an annual rate of 2.6% in the first quarter, faster than the rate of 2.2% that the government initially estimated a month ago.

In another U.S. Department of Labor report, the government will announce May's unemployment report Friday, and it is expected to show that employers trimmed 60,000 jobs in the month. But with the cuts to service sector payrolls in Wednesday's ISM report, Bullard said the number of jobs lost could be even greater than anticipated.

"The labor market is continuing to moderate, but these numbers add to the downside risk for Friday's report."

Monday, the more closely watched ISM Manufacturing index came in at a 49.6 reading for April, showing the fourth-straight month of contraction in that sector. The manufacturing report also showed continued weakness in the job sector, as its employment index rose only 0.1 point from April, when the index fell to its lowest level since May 2003.

Meanwhile, the part of the service sector index that gauges prices paid by businesses in the service sector for materials and services rose for the 60th straight month to 77 in May from 72.1 in April. The prices index is now at its highest level since September 2005.

The number of business owners reporting higher prices rose to 65% from 60% in April. Only 1% of respondents said prices had fallen in the month. All 18 industries that the index covers reported an increase in prices, according to ISM.

"Members' comments in May reflect concern about business conditions, inclusive of rising costs, and the overall economy," said the ISM's service sector survey chair Anthony Nieves in a statement.

Still, the outlook for the service sector appeared positive. New orders grew for the third straight month, registering a reading of 53.6 on the index, up from 50.1 in April.

"With new orders popping up, service sector activity should at least hold these levels if not increase in the next few months," said Bullard.