US services said to shrink as slowdown in growth widens

By Courtney Schlisserman  |   2008-8-4  |     NEWSPAPER EDITION

SERVICE industries in the United States probably shrank in July for a second straight month, signaling the slowdown in growth broadened, economists said before a report this week.

The Institute for Supply Management's non-manufacturing index, covering almost 90 percent of the economy, rose to 48.8 from 48.2 in June, according to the median forecast of economists surveyed by Bloomberg News. A reading of 50 is the dividing line between contraction and expansion.

Other reports this week may show home sales declined and consumer spending slowed, indicating the real estate recession and soaring fuel costs are rippling through the economy.

Concern over the outlook for both growth and inflation will prompt Federal Reserve policy makers to keep interest rates unchanged at the conclusion of their meeting tomorrow.

"There are downside risks to the economy on the housing front, the manufacturing front and household spending," said Dana Saporta, an economist at Dresdner Kleinwort in New York. "The Fed has little choice but to stand pat."

The Tempe, Arizona-based purchasing managers' group is set to release its services report tomorrow. The institute said last Friday that its manufacturing index dipped to 50 last month from 50.2, signaling factory activity stalled.

Consumers are trimming spending as gasoline prices remain near US$4 a gallon, home values fall, credit becomes more difficult to obtain and the job market weakens.

Employers cut 51,000 workers from payrolls last month, the seventh straight decline, and the jobless rate rose to 5.7 percent, the Labor Department said last Friday. The rate has risen by 0.7 percentage point since April, the biggest three-month gain since the end of the last US recession in 2001.