Ahead of the Bell: Service sector index

AP News
Posted: Jul 06, 2011 6:28 AM
Ahead of the Bell: Service sector index

The U.S. service sector, which employs nearly 90 percent of the country's work force, likely expanded in June although at a slower pace than in the previous month.

Economists expect the Institute for Supply Management's index for service companies dipped to 54 from 54.6 in May. The report will be released at 10 a.m. EDT on Tuesday. Any reading over 50 indicates expansion.

The index fell to 52.8 in April, the lowest level since August, as high gas and food prices cut into consumer spending. That hurts service companies such as retailers, restaurants, hotels and amusement parks.

While the index rose in May, service companies still face a challenging economy. Consumer confidence fell to a seven-month low in June, the Conference Board said last week. That's a sign shoppers may not spend much in the coming months.

The disappointing showing on confidence caused some economists to forecast an even steeper drop in the services index for June.

Consumers are facing numerous hurdles. Unemployment remains high, at 9.1 percent, and wages are stagnant. Credit also remains tight, and many households are still focused on paying off debt.

But gas prices have declined in recent weeks, which 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. That's down 21 cents from a month ago.

Prices at the pump peaked May 6 at $3.98 a gallon.

The ISM's services index hit a five-year high of 59.7 in February. The index plunged to a low of 37.6 in November 2008 at the height of the financial crisis. The sector contracted for all but three months in 2009.

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

A separate ISM index that tracks activity in the manufacturing sector expanded in June at a faster pace than the previous month, as supply disruptions stemming from Japan's earthquake faded.

Still, most economists say the economy grew at a weak pace in the April-June period. Growth likely came in little better than the 1.9 percent annual pace recorded in the first three months of the year.

But as gas prices decline and manufacturing picks up, many economists expect growth to rebound a bit in the second half of the year. Growth will improve to 3.2 percent in the July-December period, according to an Associated Press survey of 38 economists.