US service sector grew in June, but at slower pace

Posted July 06, 2011, at 1 p.m.

WASHINGTON — The U.S. service sector, which employs nearly 90 percent of the country’s work force, expanded for a 19th consecutive month in June. But growth slowed from May, a sign that the economy remains sluggish.

The Institute for Supply Management said Wednesday that its index for service companies dipped to 53.3 in June from 54.6 in May. Any reading above 50 indicates expansion.

The private trade group measures activity for a broad range of industries, including retail, health care, financial services and construction.

The index reached a five-year high of 59.7 in February. But since then growth has retreated. The index fell to 52.8 in April, the lowest reading since August.

High gas and food prices have left consumers with less money to spend on discretionary goods, such as vacations, appliances and furniture. That has hurt retailers, restaurants and hotels.

Paul Ashworth, chief U.S. economist at Capital Economics, said the service sector report “is a reminder that the economy is still pretty sluggish.” He said the reading for June was consistent with overall growth of around 2 percent in the April-June quarter. That’s roughly the same pace as the anemic 1.9 percent pace in the first three months of the year.

An employment index in the service sector report showed a gain in June. That suggests hiring expanded for a 10th straight month and at a slightly faster pace than in May.

Still, employers added only 54,000 net new jobs in May, much slower than the average gain of 220,000 per month in the previous three months.

The government reports Friday on hiring data in June. Economists expect the economy added only 90,000 jobs and the unemployment rate will remain at 9.1 percent, according to survey by FactSet.

New orders in the service sector posted a sharp decline, a worrisome development for future activity.

There are signs that growth will pick up in the second half of the year.

Gas prices have declined since peaking in early May at a national average of nearly $4 per gallon. That should make it easier for consumers to spend more on other goods. Gas prices averaged $3.56 a gallon nationwide on Tuesday, according to AAA.

And a separate ISM index that tracks activity in the manufacturing sector expanded in June at a faster pace than the previous month. That suggests supply disruptions stemming from Japan’s earthquake are beginning to fade.

The economy should grow at a 3.2 percent pace in final six months of the year, according to an Associated Press survey of 38 economists.

Still, growth must be stronger to significantly lower the unemployment rate. The economy would need to grow 5 percent for a whole year to significantly bring down the unemployment rate. Economic growth of just 3 percent a year would hold the unemployment steady and keep up with population growth.

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