US service sector in April grows at slowest pace in eight months

New York: Service industries in the US expanded in April at the slowest pace in eight months as companies cut back in response to higher energy costs.

The Institute for Supply Management's index of non-manufacturing companies declined to 52.8 last month, lower than the median forecast of economists surveyed by Bloomberg News, from 57.3 in March. Readings greater than 50 signal growth. Another report showed the pace of hiring cooled in April.

Stocks fell and Treasuries rose on concern that a slowdown in economic growth that began in the first three months of the year is extending into the second quarter. The report validates the Federal Reserve's decision last week to maintain record monetary stimulus to bolster the world's largest economy.

"It's another sign that we're losing momentum more broadly in this recovery," said Tim Quinlan, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina. "Businesses are still concerned about pricing power."

Inflation rises

Estimates in the Bloomberg survey of 73 economists ranged from 54.5 to 59. The Tempe, Arizona-based group's index of the industry, which accounts for about 90 per cent of the economy, averaged 56.1 in the five years to December 2007, when the last recession began.

The Standard & Poor's 500 Index fell 0.7 per cent to 1,347.32 on Wednesday. The yield on the benchmark 10-year Treasury note declined to 3.22 per cent from 3.25 per cent on Wednesday.

The ISM's measure of new orders at service providers decreased to 52.7, the lowest since December 2009, from 64.1 in March. The 11.4-point drop was the biggest since record-keeping began in 1997. A gauge of business activity, which reflects sentiment among purchasers, also declined.

The group's employment gauge dropped to 51.9 from 53.7 a month earlier.

Employment at US companies increased by 179,000 in April, the smallest gain in five months, according to figures from ADP Employer Services. The median estimate in a Bloomberg survey called for a 198,000 gain.

Fuelled by spreading unrest in the Middle East, the average price of a gallon of regular gasoline at the pump advanced to $3.98 on May 3, the highest since July 2008, according to data from AAA, the nation's biggest motoring group.

Forced to spend more for food and fuel, household purchases have cooled. Consumer spending adjusted for inflation rose at a 2.7 per cent annual pace in the first quarter, down from four per cent in the last three months of 2010, the Commerce Department said last week.

Chairman Ben S. Bernanke and the Federal Open Market Committee said last week that they will complete a $600 billion bond purchase programme in June and hold interest rates low for an "extended period," while noting that rising commodity prices will probably have only a "transitory" inflationary impact.

Union Pacific Corp, the biggest US railroad by sales, on April 20 posted a quarterly profit that trailed analysts' estimates after fuel prices climbed and winter snowstorms curbed first-quarter growth.

Union Pacific took advantage of commodity-shipping volume growth "despite spiking fuel prices and winter weather challenges across most of the nation's rail network," Chief Executive Officer Jim Young said in a statement.

The ISM services survey covers industries that range from utilities and retailing to health care, finance and transportation. Yesterday's report follows the group's May 2 figures that showed manufacturing grew more than forecast in April, driven by gains in exports and inventories.