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US service sector expands in April, but at a slower pace

AP Economics Writer

Workers construct an office building in Palo Alto, Calif., on Monday. The Institute for Supply Management Index -- which measures activity for a range of industries, including construction -- dropped slightly last month but still signals expansion. (AP Photo/Paul Sakuma)

WASHINGTON (AP) – The U.S economy’s service sector grew last month at the slowest pace since August, renewing concerns that more expensive gas and food may be weakening growth.

Service companies, which employ 90 percent of the nation’s work force, still expanded for the 17th straight month. But their growth slowed considerably because of a sharp drop in demand for their services, according to a report from the Institute for Supply Management issued Wednesday.

The private trade group of purchasing executives said its index of service-sector activity dropped to 52.8 last month. That’s down from 57.3 in March and a five-year high of 59.7 in February. Any reading over 50 indicates expansion.

The trade group measures activity for a range of industries, including retail, health care, financial services and construction. The index plummeted to 37.6 in November 2008, at the height of the financial crisis. The sector contracted for all but three months in 2009.

Many companies and economists said the decline in April reflects the impact of rising gas and food prices. Gas prices averaged $3.98 on Wednesday, up 1.5 cents from Tuesday and 32 cents higher than a month earlier, according to the AAA’s daily price gauge. Retail food prices rose in March by the most in nearly three years, according to the government’s latest report on inflation.

The spike in costs for basic necessities has left consumers with less money to spend elsewhere, leading to a decline in demand for services. The service-sectors’ measure of new orders plummeted to its lowest level since December 2009.

A weaker outlook for profits may prompt some firms to hold back on hiring and expansion plans this year.
Analysts predict the economy created 185,000 jobs in April and the unemployment rate remained unchanged at 8.8 percent. But some are saying the service-sector report and other new data suggest the numbers may be weaker when the government issues its employment report Friday.

A measure of employment in the service-sector report fell for a second straight month and is at its lowest level since September. The number of people applying for unemployment benefits has increased in two of the past three weeks.

And a report Wednesday by payroll provider ADP shows that businesses added 179,000 jobs in April, below what many economists projected and less than March’s gain of 207,000. ADP only looks at private-sector hiring. Friday’s report will likely include public-sector job losses.

“It’s clear that higher costs are making firms re-think the short-run outlook,” said Jonathan Basile, an economist at Credit Suisse.

Paul Ashworth, an economist at Capital Economics, said the service-sector report suggests economic growth will remain sluggish in the current April-June quarter. Growth slowed to a 1.8 percent pace in the first three months of this year.

Retail was the only industry out of the 18 service industries tracked by the index to report contraction. All the others, including agriculture, utilities, hotels and restaurants, and health care, reported growth in April.

Many economists cautioned against overreacting to the drop in the service-sector index, which can be volatile. Other indicators, such as healthy auto sales last month, reflect some ongoing economic strength.

“We don’t want to wave the panic flag just yet,” said Joshua Shapiro, chief economist at MFR Financial. The index posted strong gains in the January-March quarter, he noted, but the economy grew at only a 1.8 percent pace in that period. The drop in the index now “could simply be payback from unsustainably strong data” in the first quarter.

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