NEW YORK (CNN/Money) - Service sector activity in the United States grew in August, but just barely, the nation's purchasing managers said Thursday, as the biggest industry in the world's largest economy lost strength.
The Institute for Supply Management (ISM) said its index of service activity fell to 50.9 in August from 53.1 in July. Economists expected a reading of 54.0, according to Briefing.com. Any reading above 50 indicates growth in the sector.
It was the seventh straight month of growth in non-manufacturing industries, which make up $3.7 trillion of the $9.4 trillion U.S. economy and provide 82 percent of all U.S. jobs.
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President Bush comments on small businesses, job opportunities and productivity.
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But August also marked the third straight month that the sector grew at a slower pace, raising questions about the strength of the broader economy's recovery from a recession that began in March 2001 -- although economists were skeptical about how much faith to put in the relatively young report, which has only been compiled for the past five years.
Investors take the number seriously "so you have to view it as being not very good news," said Brown Brothers Harriman economist Lara Rhame, a former Federal Reserve economist. "But I'm not a fan of it. It's so new, and it doesn't seem to correlate with overall output."
"Look at the subcomponents -- what are inventories and new orders in this case?" Rhame asked. "If I were the purchasing manager at a hospital and somebody asked me about 'new orders,' what would I count? Syringes? Patients? At a bank, what's 'inventory?' Palm Pilots? Mortgages?"
Nevertheless, the weakness in the report, combined with an earlier Labor Department report showing continuing weakness in the labor market, helped drive U.S. stock prices lower, while Treasury bond prices rose.
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Also dragging down stock prices were disappointing reports of chain-store sales in August. Even discounters like Wal-Mart (WMT: down $1.40 to $50.94, Research, Estimates) and Target (TGT: down $1.22 to $33.10, Research, Estimates) reported worse-than-expected sales at stores open for a year or more, a key measure of retail activity.
Weaker retail sales raise questions about the continuing strength of consumer spending, which fuels two-thirds of the total U.S. economy.
In a separate report, the Commerce Department said orders for goods made in U.S. factories rose in July, recovering from June's dramatic drop. It was better news for the economy, but it was also old news.
In another old-news report, the Labor Department said it revised upward its reading of second-quarter productivity growth. That's good news for corporate profitability and could help keep prices low in the long run, but could be bad news for workers in the short term.
"Companies are doing more, with fewer people," Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd., said in a note.
In its report, the ISM said some of its members had said recent turbulence in the stock market had hurt business, while other members said business was either stabilizing or getting better.
The ISM's new orders index fell to 51.6 from 52.6 in July. The employment index rose to 47.3 from 45.8 in July, staying below 50 for the 18th straight month, which indicates that jobs were still cut, although at a slower pace.
On Tuesday, the ISM's report on manufacturing activity showed growth in that sector was barely positive in August, adding to questions about the prospects for business spending.
Fed Chairman Alan Greenspan and other economists have cited business spending as critical to the economy's recovery; a slowdown in corporate investment fueled the recession to begin with.
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