Service sector grows in August
ISM index of non-manufacturing activity beats expectations in first show of expansion since May.
NEW YORK (CNNMoney.com) -- The nation's service sector expanded in August for the first time in three months, according to a survey of industry executives released Thursday.
The Institute for Supply Management's (ISM) non-manufacturing index rose to 50.6 from 49.5 in July. Economists were expecting a reading of 49.5, according to a consensus compiled by Briefing.com.
A reading above 50 indicates growth in the sector, and a reading below 50 means that the sector is contracting.
The service sector includes real estate, construction, mining, fishing, agriculture, health care, finance, insurance and administration.
Despite the improvement, Sam Bullard, an economist at Wachovia, said the report reflected a weak domestic economy.
He said that while the gross domestic product, the broadest measure of the nation's economy, is rising, the rate of growth is below the long-term trend growth.
"And we're not seeing that snap back effect that's associated with a recovery in a recession," said Bullard.
The survey showed the biggest gains in business activity, while employment contracted.
The reading on business activity for August increased to 51.6, a sign of growth from July's reading of 49.6, which indicated contraction. In August, 23% of respondents reported higher business activity, 53% reported the same, and 24% reported a lower level of business activity. It was the highest reading since May's 53.6.
Bullard attributed the growth in business activity to consumer spending that was spurred by the federal stimulus payments issued this spring and summer.
"Chances are, most people spent a portion of that and it increased activity in the service sector," he said. "That will be diminished going forward, and business activity will be more dependent on the underlying health of the economy."
Employment continued its fourth month of contraction at a faster rate in August, falling to 45.4 from July's 47.1.
This came as the number of newly laid-off workers seeking unemployment benefits rose last week to 444,000, a higher reading than economists expected and an indication of a weak job market.
On Wednesday, a consulting firm reported that employers said they would cut 377,325 jobs from May to August, the highest level of summer job cut announcements since 2002.
"This number just confirms that the service side of the labor market remains very weak, and we don't see any improvement in the near future," Bullard said.
The prices business owners paid for materials and services increased again in August in a pattern dating more than five years. While prices were on the rise, they increased at a slower rate in August than the prior month, falling to 72.9 from 80.8, a drop of nearly 8%.
The percentage of survey respondents reporting higher prices was 50%, while 38% indicated no change in prices. Only 12% of respondents reported lower prices.
Crude oil prices have dropped about 25% from the high on July 11. Bullard believes the drop is a big reason why the survey's prices index - while well above the 50-mark baseline - has fallen over the past month.
The prices component showed that "what we saw in August was due to oil coming off recent highs and we expect that trend will continue," Bullard said. "With slower global growth, the trend in prices paid in this measure should subside."
The survey showed that demand for new orders also contracted, but at a slower pace in August, with the component rising to 49.7 from 47.9 in July. 
